Businesses: Beware the Corporate Transparency Act

Does my business have to file a report?

It probably does. Entities required to report (aka a “reporting company”) include most corporations, LLCs, partnerships, certain types of trusts, and more.

For purposes of the CTA, a reporting company is defined as:

“a corporation, limited liability company or other similar entity that is created by the filing of a document with a secretary of state or similar office under the law of a state, or formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a state.”

Under that broad description, one should assume that any business that exists as a legal entity separate from the owner(s) will be required to comply with the CTA’s reporting requirements.

Are there exceptions?

Yes, the CTA provides a list of 24 “exempt entities” – mostly larger companies in heavily regulated industries, such as banks, insurance companies, SEC-registered companies, utilities, many 501(c) tax-exempt organizations, etc. (See a list of

exempt entities

.)

The exemptions include a “large operating company,” i.e., one that (a) employs more than 20 employees on a full-time basis in the U.S.; (b) “filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate”; and (c) has an “operating presence at a physical office within the United States.”

If your entity does not quality for one of the 24 exemptions, you should assume that it is a reporting company.

What do we have to report?

The required information about the reporting company is pretty straightforward, consisting mainly of its:

• legal name;

• trade names or DBAs, if any;

• physical address;

• jurisdiction of formation (e.g., Arizona); and

• Employer Identification Number (EIN), also known as the federal tax identification number.

The reporting company must also provide specific information about (a) the “company applicant” (i.e., the individual who filed the application to form the legal entity) and (b) each of the reporting company’s “beneficial owners” (described below). For each of those individuals, the report must include his or her:

• name;

• date of birth;

• home or business address; and

• a unique identifying number from an acceptable identification document, such as a passport, along with an image of that identification document.

  
  
  

  

  
  

What is a “beneficial owner”?

The government defines a “beneficial owner” as “a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise”:

• exercises “

  
  

  substantial control” over the entity;

• owns 25% or more of the equity interests of a corporation or limited liability company; or

• receives substantial economic benefits from the assets of a corporation or limited liability company.

An individual will be considered to have “substantial control” of a reporting company if he or she:

• serves as a senior officer;

• has authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar governing body);

• has direction, determination or decision of, or substantial influence over, important matters; or

• has another form of involvement that could be reasonably construed as “substantial control.”

  
  
  
  

When do we have to file our report?

If your business entity was in existence before January 1, 2023, you have 12 months to file your initial report.

If your business was created on or after January 1, 2023, you have just 14 days from its creation date.

How do we file our report?

Our less-than-exhaustive research on this topic did not produce a clear answer to that question. Perhaps it’s too soon, as publication of the final CTA regulations is not expected until March 2022.

We do know that your report is to be filed with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

What if we don’t file a report?

Failure to file, on time, can become an expensive proposition.

“Willful” violations of the Corporate Transparency Act can carry civil penalties (e.g., $500/day for each day past a deadline) and, in some cases, criminal liability (up to $10,000 in fines and up to two years in prison).



How often do we have to file?

That’s an excellent question – one that reveals perhaps the greatest risk for a reporting company.

While filing your initial report doesn’t seem too burdensome, the trick is that

every time something in your report changes, you have file another report.

For all reporting companies:

• any change

  
  
  

  to a previously filed report must be reported to FinCEN

  
  
  

  within 30 days of the change,

  
  
  

  and

  
  
• 
  

  any error in a filing must be corrected

  
  
  

  within 14 days of filing.

Let’s use this simple example: In June you file your initial report. On September 1, your business relocates to a new facility, or one of its beneficial owners moves into their new home. You have until September 30 to report the move to FinCEN. If you don’t send in the new address until October 10, and the delay is found to be “willful,” your business may have to pay a $5,000 civil penalty (10 days @ $500). And if your report contains an error, and you “willfully” don’t correct it by October 24, that could start the clock ticking on another penalty.

Conclusion

. While the December 31, 2023, reporting deadline seems like, well, more than a year away, it’s not too soon to start gathering the required information, especially if your business has multiple owners and/or multiple entities.

At the very least, make it the job of someone in your company to research the Corporate Transparency Act (don’t just take our word for it) and to prepare a timeline that will promote compliance with the new law.