Corporate Transparency Act affects business compliance

by Dominic Dachille ([email protected]) 430 views 

It may sound like a law born from a movie plot packed with money laundering and terrorism financing, but the Corporate Transparency Act (CTA) has real-world implications for many as the government works to curb illicit activities performed under the guise of legitimate business.

Signed into law last year, the CTA represents the most impactful piece of federal business legislation you have likely never heard of. However, whether you’ve heard of it or not, the importance of compliance should not be ignored by businesses operating in the United States.

Under the CTA, certain entities, including corporations, limited liability companies (LLCs), and other entities registered with the secretary of state, are required to disclose certain ownership and other information to the Financial Crimes Enforcement Network (FinCEN). This includes entities originally formed in the United States and entities organized overseas, but registered to do business in the United States.

So what’s required and of whom? 

Reporting companies formed before January 1, 2024 must submit an initial report by January 1, 2025.  The initial report must include the entity specific information and the beneficial owner information.  Reporting companies formed after January 1, 2024, but before January 1, 2025 must submit an initial report within 90 days of entity formation. The initial report must include the entity specific information, the beneficial owner information, and the company applicant information. Reporting companies formed after January 1, 2025, must submit an initial report within 30 days of entity formation. The initial report must include the entity specific information, the beneficial owner information, and the company applicant information.  

A beneficial owner is defined as any individual who directly or indirectly through any contract, arrangement, understanding, or relationship: 

  • Exercises substantial control over the reporting company; or 
  • Owns or controls at least 25% of the reporting company. 

A company applicant is defined as any person who: 

  • Directly files the document creating a domestic reporting company, or first registering a foreign reporting company in the U.S.; or 
  • Was primarily responsible for directing or controlling such filing.

Reporting companies must disclose certain information concerning the entity itself and the entity’s beneficial owners and company applicant(s). The entity specific information includes its registered name (and all dba’s), business address, jurisdiction of formation, and unique identifying number (such as FEIN or Tax ID Number). For each beneficial owner and company applicant, the entity is required to disclose the individual’s legal name, date of birth, business, or residential address (depending on the nature of the individual), passport or driver’s license number, and an image of the individual’s driver’s license or passport.  

Compliance with the CTA is important for several reasons. 

First, it aligns the United States with its western counterparts in making efforts to combat financial crimes by making it more difficult for individuals to hide behind opaque corporate structures. By requiring disclosure of beneficial ownership information, the United States is hoping to create a more transparent and accountable financial system, deterring illicit activities and enhancing trust among stakeholders.

Additionally, non-compliance may tarnish a company’s reputation, leading to loss of trust among customers, investors, and business partners.

Finally, failure to comply with the CTA’s reporting requirements may result in penalties. Notably, fines for non-compliance are up to $500 per day of non-compliance, up to a maximum of $10,000 in the aggregate. In cases of fraud or other severe non-compliance, punishment includes possible imprisonment of up to two years.

The Corporate Transparency Act represents a significant shift towards greater transparency and accountability across the US business landscape. Compliance is essential for businesses to uphold legal standards, mitigate risks, and maintain trust with stakeholders. Non-compliance, on the other hand, can lead to serious consequences, including legal penalties and reputational damage. Accordingly, businesses should be proactive regarding CTA compliance as they, and the rest of the country, continue to navigate a new and evolving regulatory landscape.

All required disclosures must be submitted using FinCEN’s e-filing system, which is accessible here.

Editor’s note: The author of this commentary is Dominic Dachille, an attorney with Rose Law Firm. The opinions expressed are those of the author.