The implementation of the Corporate Transparency Act (CTA) marks a significant shift towards enhanced transparency for U.S. businesses. In this post, we’ll provide a guide for companies on compliance with the new reporting obligations of the Corporate Transparency Act.
Understanding the Corporate Transparency Act
The Corporate Transparency Act requires companies to disclose detailed beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Generally speaking, “beneficial owners” are the individuals that own or control the company. For companies created or registered prior to January 1, 2024, reporting must be completed by January 1, 2025. For new companies created or registered in 2024, reporting must be completed within 90 days.
Step 1: Determine Reporting Obligations
The first step for companies is to assess whether they fall under the category of “reporting companies.” There are 23 types of entities exempt from reporting, including banks, credit unions, publicly traded companies, and nonprofits. However, most privately held corporations, limited liability companies (LLCs), and other similar entities are typically subject to the reporting requirements.
Step 2: Identify Beneficial Owners
A beneficial owner is an individual who directly or indirectly (a) exercises substantial control over a company or (b) owns or controls at least 25% of the ownership interests of a company. Under this framework, determining who constitutes a “beneficial owner” can be complex and far-reaching.
For companies created or registered after January 1, 2024, in addition to the beneficial owners, the company applicant (i.e., the individual who files or registers the company) and any individual who “directs or controls the filing” must be reported.
Step 3: Compile Required Information
Create an accurate record of the required beneficial ownership information for each identified individual. This includes details such as the full name, date of birth, current address, a unique identifying number (e.g., U.S. passport or state driver’s license), and an image of this document.
Step 4: Prepare for Reporting to FinCEN
After compiling the information in the steps above, it’s time to submit the beneficial ownership report to FinCEN.
Step 5: Monitor and Update
Establish an ongoing process to monitor changes in beneficial ownership and update records accordingly. The CTA requires companies to report changes within specified timeframes, so updating this information is essential for sustained compliance.
Punishment for Noncompliance
A company’s failure to report complete, accurate, or updated beneficial ownership information can result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.
Navigating compliance with the Corporate Transparency Act requires a strategic and proactive approach. By understanding reporting obligations, identifying beneficial owners, compiling accurate information, preparing for reporting, and maintaining ongoing monitoring processes, companies can position themselves as responsible corporate citizens while mitigating legal and financial risks associated with non-compliance.