The Corporate Transparency Act (CTA) was signed into law as part of the National Defense Authorization Act. The goal of this legislation is to make information about who really owns or controls certain corporations and limited liability companies more readily available to law enforcement. Why? To crack down on the use of shell companies in enabling financial crimes.
Key Components and Reporting Requirements
The main reporting requirements include:
- Certain corporations and LLCs must report identifying information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN). This includes anyone who exercises substantial control over the company or owns 25% or more of the ownership interests.
- The reporting companies need to provide beneficial owners’ names, birthdates, addresses, and a unique identification number from an acceptable identification document like a driver’s license or passport. This information will be accessible to certain law enforcement agencies and regulators.
There are some exemptions to the reporting requirements for specific types of lower-risk entities like publicly-traded companies. Most operating corporations and LLCs, however, need to comply.
Penalties for Noncompliance
There are significant penalties for failing to comply with the reporting obligations, including:
- Civil penalties up to $500 per day that reports are late
- Fines of up to $10,000 or up to 2 years imprisonment for willful failure to report
Required Next Steps
To meet your obligations under this new law, you should:
- Identify any beneficial owners in your business and gather the required identifying information
- Set internal processes to keep ownership information updated going forward
- Submit initial reports about your beneficial owners to FinCEN when required
When to Report
- Companies formed before 2024, must make their initial filing by the end of 2024
- Companies formed in 2024, must file within 30 days of formation or registration
Companies should also consider taking some additional steps clients to comply with the CTA:
Review Company Structure and Agreements
Carefully review your corporate bylaws, operating agreements, shareholder agreements, and other organizational documents to understand the ownership structure and whether any revisions are needed to align with the reporting requirements. Specifically look at any provisions around the transfers of ownership interests, voting rights, dividend rights that may need to be updated now that more information about beneficial owners must be reported.
Put Processes in Place for Future Ownership Changes
- Put procedures and internal tracking mechanisms in place to monitor changes in ownership interests going forward. Changes in beneficial owners will need to be timely reported in accordance with the new legislation.
- Ensure you collect necessary identifying details upfront when new investors, shareholders, or members join the company. This will facilitate any future reporting needs.
Document Ownership Details
Create detailed records of all individuals with ownership stakes and the sizes of those interests in the company. track changes over time and keep supporting documentation.
Formalize Roles and Responsibilities
Appoint internal roles like a CTA compliance officer to take charge of ongoing monitoring, reporting obligations, and updating senior management.
I recommend taking proactive steps to understand the law’s implications for your business. Reach out with any questions!