March 21, 2023

This paid piece is sponsored by Woods, Fuller, Shultz & Smith PC.

Written by the Corporate Mergers & Acquisitions Practice Group of Woods Fuller

As part of a growing trend, governments around the world are increasingly introducing legislation that mandates increased transparency from businesses. In the U.S., the Corporate Transparency Act was signed into law in January 2021, requiring corporations and other legal entities to report information about themselves and their ownership to the Financial Crimes Enforcement Network. In this piece, we will provide an overview of the CTA and what businesses need to know to comply with its requirements.

What is the Corporate Transparency Act?

In an effort to counter money laundering, the financing of terrorism and other illicit activity, this new federal law creates significant federal reporting requirements for most companies, including corporations, limited partnerships, limited liability partnerships, limited liability companies and certain statutory trusts. CTA’s requirements go into effect starting Jan. 1, 2024.

Who is required to report?

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

Are there exemptions?

Yes, but only for entities such as publicly traded companies; “large operating companies” that employ more than 20 employees on a full-time basis in the U.S., have an operating presence at a physical office in the U.S. and generate more than $5 million in annual gross receipts or sales; or others specifically enumerated by statute — 24 in total — such as a wholly owned subsidiary of an exempt entity. Companies that are exempt initially and later fall out of compliance with the exemption will have 30 days to become a reporting company by filing their necessary reports.

When will initial reports be required to file?

For reporting companies created on or after Jan. 1, 2024, reports must be filed within 30 days of receipt of notice that the entity is effective or registered to do business or when the secretary of state or similar office provides public notice that the reporting company was created or registered to do business, whichever is earlier. For reporting companies created before Jan. 1, 2024, reports must be filed by Jan. 1, 2025.

What information is required to be reported?

A reporting company must report its full legal name and trade name, current street address,  jurisdiction of legal organization and IRS taxpayer identification number.

Reporting companies also must report the following information about their beneficial owners — and for any newly created reporting company after Jan. 1, 2024, about their applicants: full legal name, date of birth, current residential address, a nonexpired U.S. identification document such as a driver’s license or passport and an image of the beneficial owner and applicant used in the document.

A “beneficial owner” is anyone exercising substantial control of a reporting company, who has or controls at least 25 percent of the ownership interest in a reporting company. Substantial control likely will require that a reporting company include as beneficial owners its directors/managers, senior executive officers and any person with a right to vote on major decisions. In many cases, a reporting company will need to conduct a look through of an entity — corporation, LLC, partnership, trust — that is a member or shareholder of the reporting company and potentially report these persons as “beneficial owners” of the reporting company even though the ownership is indirect. There is also a specific rule for trusts in determining whether a trustee, beneficiary or grantor is a beneficial owner.

A “company applicant” is an individual who files or helps to prepare the document that creates the reporting company or qualifies it to do business — that is, anyone such as  an attorney, accountant, etc. who filed the articles of incorporation, articles of organization or application for qualification to do business.

When will initial reports need to be updated?

Updates must be made within 30 days after there is a change to previously reported information or a reporting company becomes aware that previously reported information is inaccurate. For example, if a beneficial owner transfers ownership to another individual, the reporting company will have 30 days to submit an updated report.

What are the penalties for failing to report or inaccurate reporting?

A reporting company that fails to file timely may be assessed a $500 penalty for each day the report was delayed. The CTA also provides criminal penalties of a $10,000 fine or up to two years in prison when a reporting company willfully fails to report complete or updated information or willfully provides false or fraudulent information.

What to do now?

Existing or proposed companies should start to understand the requirements of the CTA, determine who will have the duty to monitor compliance, assess and establish procedures for determining the identity of beneficial owners and collection of necessary information to report and ensure any existing or proposed governance documents such as operating agreements or shareholder agreements will adequately address the CTA.

Please contact Woods Fuller with any questions or for assistance.