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How the Corporate Transparency Act Affects Your Business

Lamarre Law Group, P.A. Jan. 4, 2024

If you own or operate a business in the U.S., you may have heard of the Corporate Transparency Act (CTA). This new law was passed by Congress in 2021 as part of the National Defense Authorization Act. The CTA requires certain businesses to report information about their beneficial owners, who are the individuals who directly or indirectly own or control the business, to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department. The purpose of the CTA is to prevent the misuse of shell companies or other opaque structures by bad actors who want to hide or benefit from their illicit activities, such as money laundering, tax evasion, fraud, terrorism, or human trafficking.

The CTA will have significant implications for many businesses in the U.S., especially those privately held, with few employees, or operating across multiple jurisdictions. In this blog post, we will explain the CTA, who it applies to, what it requires, and what you must do to comply with it.

What is the CTA?

The CTA is a federal law that mandates the creation of a secure, non-public database of beneficial ownership information for certain businesses in the U.S. The database will be maintained by FinCEN, which is the agency responsible for enforcing anti-money laundering and counter-terrorism financing laws in the U.S. The database will only be accessible by authorized officials for national security, intelligence, and law enforcement purposes, as well as by financial institutions, with the consent of the reporting company.

The CTA defines a beneficial owner as any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

  • Exercises substantial control over the entity; or

  • Owns or controls at least 25% of the entity's ownership interests.

The CTA also defines a reporting company as any corporation, limited liability company, or similar entity that is:

  • Created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe or

  • Formed under the law of a foreign country and registered to do business in the U.S. by filing a document with a secretary of state or a similar office under the law of a state or Indian tribe.

The CTA excludes certain entities from the definition of a reporting company, such as:

  • Entities such as banks, credit unions, insurance companies, public companies, charities, etc., are already subject to federal or state regulation and disclosure requirements.

  • Entities that have more than 20 full-time employees in the U.S., file income tax returns in the U.S. reporting more than $5 million in gross receipts or sales, and have a physical presence in the U.S.

  • Entities owned or controlled by one or more entities that meet the above criteria.

What does the CTA require?

The CTA requires reporting companies to submit a report to FinCEN that contains the following information for each beneficial owner:

  • Name

  • Date of birth

  • Current residential or business street address

  • A unique identifying number from an acceptable identification document, such as a passport, driver's license, or FinCEN identifier

The reporting requirement will take effect on January 1, 2024, and reporting companies will have to update their information whenever there are changes in their beneficial ownership. Reporting companies that existed before the effective date will have to file their initial report within two years after the effective date. Reporting companies formed after the effective date must file their initial report at the time of formation or registration.

The CTA imposes civil and criminal penalties for failing to report, reporting incomplete or inaccurate information, or disclosing or using the reported information in an unauthorized manner. The penalties can range from $500 per day for each day that the violation continues up to $10,000 and/or imprisonment for up to two years.

What do you need to do to comply with the CTA?

If you are a reporting company under the CTA, you need to take the following steps to comply with the law:

  • Identify your beneficial owners and collect their information

  • File your initial report with FinCEN by the deadline

  • Update your report whenever there are changes in your beneficial ownership

  • Maintain records of your beneficial ownership information and your filings with FinCEN

  • Protect the confidentiality and security of your beneficial ownership information and your filings with FinCEN

  • Review and respond to any requests or inquiries from FinCEN or other authorized parties

The CTA is a complex and far-reaching law that will affect many businesses in the U.S. It is essential to understand your obligations and responsibilities and prepare for compliance as soon as possible. If you need help with the CTA or any other tax-related issues, please contact us at Lamarre Law Group, P.A. We are a team of experienced and knowledgeable tax lawyers who can assist you with all your tax needs. We offer a free initial consultation and a flat fee for our services.

We look forward to hearing from you soon.