Corporate Transparency Act
What Legal Entities Should Know About CTA Compliance
The Corporate Transparency Act (CTA) is a federal law that aims to combat financial crimes by establishing a federal database of reporting companies and information about the individual involved in each company’s formation, control, and ownership. The CTA will affect over 25 million existing business entities and another 3-4 million new entities each year.
Amongst the other annual reports and legal requirements by which your business must abide, it can be difficult to manage the necessary documents and data and meet deadlines. Many modern organizations are adopting an entity management solution to better manage their entities and compliance data in real-time and ensure ongoing compliance with the requirements of the Corporate Transparency Act.
What is the Corporate Transparency Act?
The Corporate Transparency Act was enacted into law on January 1, 2021 as part of the 2021 National Defense Authorization Act. This mandate requires domestic and foreign legal entities to file a report with the Division of the Department of Treasury called the Financial Crimes Enforcement Network (FinCEN), which also regulates it. The report must provide personal information about the entities’ individual beneficial owners and applicants with the intent of preventing corrupt actors, terrorists, and criminals form laundering money in the United States.
Who Does the Corporate Transparency Impact?
For businesses and legal entities, the Corporate Transparency Act significantly changes your obligations to disclose previously private information regarding the ownership and control of each of your entities. When enacted, if your business is identified as a “reporting company”, you will be required to file, and regularly amend, an annual beneficial ownership report with FinCen.
When Does the Corporate Transparency Act Take Effect?
The Corporate Transparency Act takes effect beginning January 1, 2024. The filing deadline for any reporting company existing or registered before this effective data is January 1, 2025.
Why is the Corporate Transparency Act Being Enforced?
The new law is intended to enforce legal compliance by companies operating in the United States. The Corporate Transparency Act tracks beneficial ownership of entities and is intended to prevent corrupt actors, terrorists, and criminals from laundering money in the U.S. More specifically, the law targets the practice of using shell companies to hide illegal activities.
Is My Legal Entity a “Reporting Company” Under the Corporate Transparency Act?
FinCEN has provided criteria to help legal entities determine whether they should identify as a “reporting company” under the new act. Under the new requirement, only “reporting companies” are required to file a report. A reporting company is classified as any legal entity that is:
→ Created by the filing of a document with the secretary of state or a similar office under the law of a State or Indian Tribe
→ Formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State or Indian Tribe
These criteria include but are not limited to corporations, LLCs, most partnerships, certain trusts, and other entities.
What are the Corporate Transparency Act Filing Exemptions?
FinCEN has created 23 exemption categories. These generally apply to entities that are already subject to significant state or federal regulations, so their ownership information is typically already available/known. These include entities like SEC reporting companies, regulated financial service companies (such as banks, credit unions, and registered broker dealers), insurance companies, public accounting firms, publicly-traded companies, charitable organizations, and public utilities. One big exemption category is any Subsidiary that is 100% owned by one or more Exempt Entity — these are also exempt.
Finally, there is a catch-all exemption to help mid-sized established private companies. It allows for an exemption if your company (1) employs more than 20 employees on a full-time basis in the U.S., (2) filed a federal income tax return in the U.S. showing more than $5M in gross receipts the previous year (excluding sales outside the U.S.), and (3) has a physical office in the U.S.
What are the Risks of Corporate Transparency Act Non-Compliance?
As with most legal requirements, the consequences of non-compliance with the Corporate Transparency Act can be minor or severe (depending on the situation at hand). It is against the law for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCen. Additionally, it is illegal to willfully fail to report complete or updated beneficial ownership information to FinCen. Failure to abide by the CTA or to knowingly report false information may result in substantial fines or even criminal conviction and jail time. These non-compliance risks can have legal, financial, business, and reputational impacts on your company.
Note: The CTA contains a safe harbor from civil or criminal liability for the submission of inaccurate information if a report containing corrected information is submitted “voluntarily and promptly” (and no later than 90 days after the submission of the original inaccurate report).
Regulatory or legal action brought against the organization or its employees could result in fines, penalties, or imprisonment.
Financially, non-compliance can impact the organization’s bottom-line, share price, potential future earnings, or loss of investor confidence.
Any unfavorable events that occur as a result of non-compliance could significantly disrupt the organization’s ability to operate.
The pressure is high when managing multiple compliance and filing deadlines for multiple entities. Missed reporting deadlines and/or non-compliance can result in damage to the organization’s reputation or brand that causes a loss of customer trust or decreased employee morale.
Organizations and/or parties that opt not to comply with the CTA risk penalties that could include (1) fines of up to $500 for each day there is a willful failure to comply, (2) a maximum penalty of $10,000 in fines, (3) a prison term of up to 2 years for any party who does not comply. Further, unauthorized disclosure or use of the submitted beneficial ownership information is punishable by civil penalties of $500 for each day the violation continues and criminal penalties of imprisonment of up to 10 years and fines of up to $500,000.
What are the Benefits of Using Entity Management Software Corporate Transparency Act Compliance?
As you prepare to meet the Corporate Transparency Act filing deadline, entity management software can help you streamline and simplify the compliance process. The right entity management tool can help you track upcoming deadlines, manage your documents, and secure you r information. And because your filing documents contain personally identifiable information, you’ll want to ensure that information is safeguarded from external parties. Otherwise, data breaches may occur. As such, the ability to securely sytore information and track deadlines is extremely valuable.
Entity management software, like EntityKeeper, simplifies Corporate Transpareency Act ocmpliane with features and tools that enable you to
→ Track filing deadlines
→ Receive automated alerts for filing due dates
→ Centralize information and document storage
→ Create committees or groups for beneficial owner/reporting company
→ Use personnel records for addresses and social security numbers.
Preparing and implementing a framework for CTA compliance may feel overwhelming. But it’s important to set your organization up for success by being proactive. While the first year may be challenging, once all of your information and documents are compiled and stored within entity management software, you will have a solid strategy to ensure ongoing compliance.
Comply with the Corporate Transparency Act with EntityKeeper!
By planning and preparing for the Corporate Transparency Act to take effect, your organization can confidently comply with the new regulation and ensure that you meet the filing deadlines. An entity management solution, like EntityKeeper, can further streamline your processes to ensure ongoing compliance.
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VP, Legal Services