Business Owners - Are You Ready for Corporate Transparency Act Compliance?

As a business owner, you may have heard rumors about the Corporate Transparency Act (CTA), which was signed into law in January 2021 as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act. The CTA requires certain businesses, primarily smaller, otherwise unregulated companies, to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) in an effort to combat money laundering, terrorism financing, and other illicit activities. 

So, what are the requirements of the CTA, and how do they affect your business? Here’s what you need to know.

Who is affected?

The CTA applies to certain businesses, including corporations, limited liability companies (LLCs), and other similar entities that are formed under state law. Specifically, the law applies to businesses that are either created or registered under state law, or that have a physical presence in the United States and do business in certain industries.  Unless exempted, the business is subject to the reporting rule.  The exemptions are somewhat limited and include governmental authorities, banks, credit unions, money services businesses, registered broker dealers, exchanges and clearing agencies, insurance companies, accounting firms, public utilities, certain tax-exempt entities, and entities assisting tax-exempt entities.

What information must be disclosed?

Under the CTA, covered businesses must disclose certain information about their beneficial owners, including their full legal name, date of birth, current address, and identification number (such as a passport or driver’s license number). Beneficial owners are defined as individuals who directly or indirectly own 25% or more of the equity interests in a covered business, or who exercise substantial control over the management or policies of the business.  Certain companies must also identify “company applicants” who directly file, and who are primarily responsible for filing, or directing or controlling the filing of, the entity’s formation documents.

When do businesses need to disclose this information?

The reporting requirement goes into effect on January 1, 2024.  Companies created before January 1, 2024 will have one year to file the required information.  These companies are required to submit information about their beneficial owners but are not required to report information about their company applicants.  Companies created on or after January 1, 2024 will be required to file the required information within 30 days after receiving notice of an effective formation or registration.  Companies formed or registered after the effective date of the reporting requirements are required to include information on both company applicants and beneficial owners.  Any change to information previously reported must be updated within 30 days of the date of the change.  Inaccuracies must be corrected within 30 days of when the company becomes aware of the inaccuracy. 

What are the penalties for noncompliance?

Businesses that fail to comply with the CTA may be subject to civil and criminal penalties, including fines of up to $10,000 and imprisonment of up to two years. In addition, failure to comply may also result in the loss of certain legal protections, such as limited liability status.

What should you be doing now?

If you are or potentially are a covered business, you should begin identifying your beneficial owners and gathering the necessary information required by FinCEN. Businesses may also need to update their organizational documents, such as their operating agreements or bylaws, to reflect the new disclosure requirements. Finally, businesses should work with legal and financial advisors to ensure that they are fully compliant with the law’s requirements.

This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.