What you need to know about the Corporate Transparency Act (CTA)
The Corporate Transparency Act (CTA), which goes into effect on January 1, 2024, is an effort by the U.S. government to curb the use of shell companies for tax evasion, money laundering, and other corrupt purposes. By implementing this reporting and disclosure requirement, the U.S. joins almost 200 other countries that have implemented similar regulations through the Financial Action Task Force.
What is the CTA?
The primary objective of the CTA is to do away with anonymous shell companies and, by doing so, disrupt the flow of illegal proceeds and other types of illicit financing. These shell companies are a known tool used by criminal enterprises and corrupt officials to hide their financial activities. Accordingly, the CTA is being administered by the Financial Crimes Enforcement Network (FinCEN) under the Department of the Treasury.
Who is required to report?
Domestic companies, including corporations, limited liability companies (LLCs), and other entities formed through state or tribal filings, are required to report. Similarly, foreign reporting companies, entities established under foreign law but engaged in business within U.S. states or tribal jurisdictions, also fall under the CTA’s scope.
What does the CTA require?
The CTA mandates that starting on January 1, 2024, all U.S. businesses, with some exceptions, submit “beneficial ownership” information to FinCEN. This information includes:
Legal Name: The official name of the business.
Trade Names: Any other names the business operates under.
Address: The current street address of the business’s primary place of operation.
Jurisdiction of Formation: The state or country where the company was established.
Taxpayer Identification Number: The unique identification number for tax purposes.
In addition to business information, reporting companies must provide details about their beneficial owners and company applicants. This includes:
- Name, Date of Birth, and Address: Of each individual who owns or controls at least 25 percent of the ownership interest or exercises substantial control over the reporting company.
- Unique Identifying Number: From an acceptable identification document.
- Issuing Authority: The state or jurisdiction that issued the identification document.
Who is a Beneficial Owner?
A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25 percent of its ownership interest. There are exceptions, including minors, nominees, employees, inheritors, and creditors. The CTA also emphasizes the importance of trusts, where individuals may indirectly control ownership interests.
A reporting company can have up to two individuals who qualify as company applicants and are responsible for filing relevant documents for the reporting companies. If only one person is involved, only that person should be reported. This requirement applies to reporting companies formed or registered on or after January 1, 2024.
Exemptions under the CTA: Balancing accountability and efficiency
While the CTA aims to foster transparency, it also recognizes the importance of efficiency and practicality. Many entities are granted exemptions, specifically companies that are already reporting their ownership under other regulations such as public companies, banks, credit unions, and insurance companies.
Entities registered with the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), along with certain pooled investment vehicles advised by these entities, are also exempt.
Special exemption for Large Operating Companies
The CTA also exempts large companies which meet all of the following criteria:
- Employ more than 20 full-time employees in the United States;
- Have an operating presence at a physical U.S. office; and
- Have filed a U.S. federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales (excluding non-U.S. sources).
Deadlines for Compliance
- Existing companies formed before January 1, 2024: Reports are due by January 1, 2025.
- Companies created on or after January 1, 2024: Reports must be filed within 30 days of the creation or registration becoming effective.
- Updated reports: Required within 30 days after any changes.
- Corrected reports: Required within 30 days after discovering inaccuracies.
Some common scenarios of companies that will be required to report are provided below:
1. Most Small Businesses.
2. Foreign Investors: A foreign investor in a U.S. tech startup that owns a significant stake (25 percent or more), which does not fall into any of the exemptions, will have to report their beneficial ownership information even though they are based outside the United States.
3. Real Estate Investment Companies: An entity that owns real estate but has no other operations will most likely be required to report beneficial owners, domestic or foreign.
Although initial compliance with the CTA may be onerous, especially for small and family-owned businesses, it may benefit companies in the long run by allowing them to attract investors and customers who value transparency.
Business Insights is hosted by the Law Firm of KPPB Law (www. kppblaw.com) based in Atlanta, Georgia with additional offices in New York, Northern Virginia, and Chicago. Parav Patel is an associate with KPPB Law’s corporate law practice led by co-founding partner Sonjui Kumar.
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