In a bid to combat money laundering, terrorism financing, and other forms of illegal financial activities, Congress passed the Corporate Transparency Act (CTA) in 2021. As a response to this legislation, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, has been granted authority to collect, protect, and disclose beneficial ownership information to specific government authorities and financial institutions.

Entities Subject to Reporting:
Under the CTA, entities known as “Reporting Companies” are mandated to comply with the new reporting requirements. These include corporations, limited liability companies (LLCs), and other entities created through filing with a Secretary of State or equivalent official. Even non-U.S. companies that register to conduct business in the U.S. are covered by the CTA.

Exceptions and Exemptions:
Several exceptions exist, particularly for entities already regulated by federal or state governments. An interesting exemption is granted to “large operating companies,” defined by meeting specific criteria such as employing at least 20 full-time U.S. employees, having gross revenue over $5 million, and maintaining a physical office in the U.S.

Identifying Beneficial Owners:
The term “beneficial owner” refers to individuals exercising substantial control or owning at least 25% of the company’s ownership interests. Substantial control includes serving as a senior officer, having authority over appointments or removals, and influencing crucial decisions within the company.

Phase-In of Reporting:

The CTA’s reporting requirements will be implemented in two stages:

New Reporting Companies formed on or after January 1, 2024, must report within 90 days of formation.

Existing Reporting Companies formed or registered before January 1, 2024, must report by January 1, 2025.

Preparing for CTA Compliance:
With the introduction of this expansive reporting regime, businesses are urged to assess the implications on their organizations. Key considerations include:

Determining if the company is subject to the CTA or qualifies for exemptions.Calculating ownership interests, particularly in companies with complex capital structures.Identifying individuals exercising “substantial control” and implementing processes for monitoring changes in beneficial ownership.

Immediate Action and Legal Considerations:
Given the unique nature of the CTA and its separation from the tax code, businesses are advised to take immediate action. Legal guidance is crucial for understanding and applying the requirements set forth in the regulations, especially in determining beneficial ownership interests.

Consulting Legal Counsel:

To make a final determination on the applicability of the CTA to your business, it is recommended to consult legal counsel. While we are happy to discuss the CTA with you, legal counsel is essential for ensuring compliance and navigating the complexities of this new regulatory landscape.

This blog post is designed to inform our valued clients about the Corporate Transparency Act and its potential impact on their businesses, emphasizing the importance of legal guidance for compliance.