The Corporate Transparency Act – Deadline Looming

The Corporate Transparency Act (“CTA”), enacted by Congress in 2021 as an initiative to prevent illicit finance, went into effect on January 1, 2024. The CTA establishes disclosure requirements for “reporting companies” in the United States. Because failure to meet these disclosure requirements could result in civil or criminal penalty, we encourage any business entity to determine whether it is subject to the CTA and, if so, to take steps necessary steps to comply with the CTA’s requirements.

Entities Subject to the CTA

The CTA requires “reporting” companies conducting business in the United States to report information about the company itself and its “beneficial owners.” Reporting companies include corporations, limited liability companies, or any other similar entity that is created by either filing a document with the secretary of state or similar office under state law, including foreign companies conducting business in the United States.[1] A beneficial owner includes any person who directly or indirectly exercises “substantial control” over the entity or “owns” or “controls” at least 25% of the entity’s “ownership interests.”[2] Individuals exercising substantial control have a certain degree of power over the company and could include (a) senior officers or directors of the company; (b) anyone with the power to appoint or remove senior officers or a majority of the company’s directors; or (c) anyone who has substantial influence over important company decisions. There is no maximum number of beneficial owners who must be reported, but each reporting company must include at least one person who qualifies as a beneficial owner.

Exempted Entities

There are certain exempted entities that are not considered reporting companies under the CTA, including banks, credit unions, tax-exempt entities, public-utility companies, and large operating companies. An entity is considered a large operating company when the entity (i) employs more than 20 full-time employees in the United States; (ii) filed Federal income tax returns in the previous year (in the United States) demonstrating more than $5 million in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States.[3] A list of the 23 exempted categories can be found here.

Disclosure Requirements

Any company subject to the CTA must report the entity’s (a) full legal name; (b) trade name or d/b/a name; (iii) address; (iv) jurisdiction of formation or registration; and (v) federal tax identification number. The report must additionally include information about its beneficial owners, including the owner’s (a) full legal name; (ii) birthdate; (iii) home address; (iv) an identifying number from a driver’s license, passport, or other approved documents; and (v) an image of the approved documents that contains the identifying number. Existing companies that were formed before January 1, 2024, must file their initial reports by January 1, 2025. Companies formed after January 1, 2024, must file their initial reports 90 days after receiving notice of their creation and registration and must also include information about the company’s applicant. Moreover, any changes in the reported information, such as shifts in beneficial ownership or management, must also be reported within 30 days of the change.

The reporting requirements under the CTA can be complex and the civil and criminal penalties for failing to disclose or update information properly can be severe (up to $500 per day in violation or up to two years imprisonment).