With the Corporate Transparency Act (CTA) becoming effective January 1, 2024, businesses must pay close attention to new compliance requirements.

WHAT IS THE CORPORATE TRANSPARENCY ACT?

Signed into law on Jan. 1, 2021, the CTA aims to create a national database of companies in the U.S. that identifies the human beings behind the companies as owners or control persons.

The CTA is part of an increasing effort to combat money laundering, terrorism, tax evasion and other financial crimes. Congress intended to help law enforcement by creating this national database of organizations that might be involved in such activities, but it will still apply to entities not so involved.

It is designed to improve business activity transparency through the reporting of beneficial ownership information (BOI) and is particularly targeted at smaller businesses. The law will be administered by the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department and the same entity that administers reporting of foreign bank accounts.

WHO MUST REPORT UNDER THE CTA?

The CTA applies to those who own greater than 25-percent interest in LLCs, S Corps, C Corps or limited partnerships. In the entertainment space, all loan-out corporations and touring companies are covered by the CTA. It also applies to those who are in “control” of the entities.

There are two categories of reporting companies: a “domestic reporting company” and a “foreign reporting company.”

• Domestic reporting companies: These corporations, limited liability companies (LLCs) and other entities created by filing with a secretary of state or similar office.
• Foreign reporting companies: These are corporations, LLCs and other entities formed under the law of a foreign country that are registered to do business in any U.S. state or Tribal jurisdiction.

There are 23 exemptions to the definition of a reporting company, which need to be closely examined to determine if the filing is required. For example, a large company exemption may apply based on the number of employees, amount of revenue, etc.

REPORTING REQUIREMENTS UNDER THE CTA

CTA requires that all “reporting companies” file BOI reports with FinCEN within the following timeframes:

• For entities that already exist before Jan. 1, 2024, initial reports are due no later than Jan. 1, 2025.
• For entities created on or after Jan. 1, 2024, their initial reports are due within 90 days from the date of creation of the entity.

As of now, there are no extensions available. Penalties range from $500 to $10,000 per violation and jail time of up to two years.

Due to the nature of civil and criminal penalties for failing to file, immediate attention to CTA and its implications is required.

UNDERSTANDING BENEFICIAL OWNERSHIP

Reporting companies are required to identify all individuals who own or control at least 25 percent of the ownership interests of the company.

A beneficial owner is any individual who, directly or indirectly, falls under one of these conditions:

• Exercises substantial control over the reporting company
• Owns or controls at least 25 percent of the ownership interest of the reporting company

Individuals who exercise substantial control typically include the senior officers of the reporting company (e.g., President, Secretary, Treasurer, CEO, CFO, General Counsel, etc.) This can also apply to business managers, investment trustees and others who exert significant control over any such entity.

Please contact GHJ’s International Tax Services Practice for a more comprehensive discussion of reporting requirements under the Corporate Transparency Act.