The CTA Keeps the Mobsters at Bay
Shell companies, money laundering, financial crimes. Sounds like it’s time to heat up some lasagna and watch “The Godfather”. Today, we’re going to talk about the “Corporate Transparency Act” (the CTA), which was passed by Congress this past January. This article is intended to give a VERY broad overview of the purpose of the CTA and its general impact on business owners. This article does not constitute legal advice. Contact your business attorney immediately for more information on the Corporate Transparency Act and its implications for your business.
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The “Lawfather”
The Purpose of the Corporate Transparency Act
The CTA creates reporting requirements for “beneficial owners” of newly formed and existing corporations, LLCs, or other corporate entities. The primary idea is that these disclosures will prevent the bad guys from pulling off the dirty deeds. I guess that means no more trips to the laundry mat.
Who is a “beneficial owner“?
In this section, I am going to discuss who is considered a “beneficial owner” and some common exceptions to the rules. First, a “beneficial owner” is any individual who directly or indirectly exercises substantial control over an entity. Second, a “beneficial owner” is any individual owning or controlling at least 25% of ownership interests of an entity. Your alarm bells start to go off. What about the about the CEO I just hired so I could play golf and enjoy retirement? My children are beneficiaries, do they have to report? What about Uncle Larry who gave us a simple $100,000 loan and doesn’t own any stock in our company?
Before you go into full panic mode, check out the exceptions below.
- Children. The kids are cool so long as the parents or guardians report information properly.
- Agents. Individuals acting on behalf of other individuals in the entity.
- Employees. Employees who exercise substantial control over the entity due to their employment (e.g. the CEO you just hired to live out your golf fantasy).
- Inheritors. Heirs, beneficiaries, the future of the world, etc.
- Creditors. Creditors aren’t required to report unless they could be considered beneficial owners (e.g. generous Uncle Larry).
Are any companies exempt from the CTA?
Yes, your company may be exempt from CTA reporting requirements. Whew! Here are some examples of notable exemptions.
- US-based companies with >20 employees and >$5 million in revenue.
- Financial institutions that report to federal agencies.
- Churches, charities, and non-profits.
What do beneficial owners need to report, and how often?
It’s all about the basics (e.g. name, date of birth, current address, passport number, etc.). Beneficial owners are required to report this information every year along with any amendments.
Where do beneficial owners send these reports?
Business owners should report to the Financial Crimes Enforcement Network (otherwise known as FinCEN). FinCEN is a bureau of the U.S. Department of Treasury and is given broad authority to implement and adopt necessary regulations to enforce CTA.
When to file?
- Forming or registering a new entity? Immediately upon formation or registration.
- New partners? Immediately upon change of ownership.
- Existing business with no change in ownership? Must report within two years of January 1, 2021.
Any Penalties?
Violating CTA reporting requirements and unauthorized disclosures are big no-nos and can carry pretty hefty penalties.
- Civil Penalties for non-reporting. Up to $500 in fines for every day the violation continues.
- Criminal Penalties for non-reporting. Up to $10,000 in fines and imprisonment for up to two years.
- Civil Penalties for unauthorized disclosures. Up to $500 in fines for every day the violation continues.
- Criminal Penalties for unauthorized disclosures. Up to $250,000 in fines and imprisonment for five years.
One Last Note.
Required compliance with CTA doesn’t begin until January 2022. This is when the regulations are officially enacted. For more detailed information about the Corporate Transparency Act, please check out this awesome article from The National Law Review or contact your business attorney.