The Corporate Transparency Act: Potential Roadblocks and Creating a Plan to Prepare

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In our recent webinar about the Corporate Transparency Act (CTA), we discussed key information to consider as you prepare to file under the new requirements. We also discussed new developments in the CTA, potential roadblocks to avoid, and how you can effectively prepare in advance.


Watch the on-demand webinar now. Or, keep reading for an overview of our conversation featuring Dawn Holland, Vice President of Asset Management at Thirty Capital Financial.


Question 1: What is the Corporate Transparency Act?

Dawn Holland: The Corporate Transparency Act was passed by Congress on January 1, 2021, as part of the 2021 National Defense Authorization Act. The CTA creates a national database of entities registered in the United States and collects information about the owners of those entities. The CTA is regulated by FinCEN – which is the US Treasury’s Financial Crimes Enforcement Network.


Question 2: Why did Congress think this type of registry was necessary?

Dawn Holland: It was created to fight money laundering and other financial crimes. The economic cost of money laundering alone is huge, not to mention political and humanitarian impacts. The UN estimates approximately $800 billion dollars is laundered globally each year– $300 billion of that occurs within the US. 

Much of the laundering occurs through shell entities. In the US alone, there are over 2 million entities formed each year – and most states don’t require any information about beneficial owners when creating the entity.


Question 3: Has the Corporate Transparency Act been implemented yet?

Dawn Holland: Final regulations were adopted by FINCEN on September 29, 2022, and regulations are effective as of January 1, 2024 (this is when the reporting requirements start). Be mindful that this effective date is not the same as the actual filing deadlines.


Question 4: When are companies required to file their CTA reports?

Dawn Holland: If the company is created on or after January 1, 2024, then the initial report is due within 30 calendar days of the date the entity is created.  This was relaxed from only 14 days in the proposed rule. If the company was formed before January 1, 2024, then the initial report is due no later than January 1, 2025. In other words, existing entities have a full year (until January 1, 2025) to file a report, but new entities only get 30 days.

You are also required to update filings within 30 days if there was a change in the information you reported. If you became aware that the information previously submitted was inaccurate, you also have a duty to file to correct it. 

Note: FinCEN does not require companies to file a report after their termination or dissolution.  It also does not require companies to report changes to the Beneficial Ownership Information of their company applicant(s).


Question 5: When you create an entity, how do you know if you are required to file under the Corporate Transparency Act?

Dawn Holland: Only “Reporting Companies” are required to file a report under the CTA. A reporting company is broadly defined as any legal entity:

(1) Created by the filing of a document with the SOS or similar office under the law of a state or Indian Tribe.  OR

(2) A foreign entity that is registered to do business in the US

This will capture Corporations, LLCs, probably Limited Partnerships, some trusts – what won’t fall under this regime are common law general partnerships and certain types of trusts.


Question 6: Will every entity created need to report?

Dawn Holland: FinCEN 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, 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 Entities – 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 US, (2) filed a federal income tax return in the US showing more than $5M in gross receipts the previous year (excluding sales outside US), and (3) has a physical office in the US.


Question 7: Once you qualify for an exemption, do you need to requalify every year?

Dawn Holland: You need to continuously meet the qualifications – so, for example, if you are exempt under the catch-all category and you stop meeting all three requirements, you now must file under the CTA. If you are using the exemption and your gross receipts go under $5M for a year, you are no longer exempt and must file. Similarly, if you are using the 100% ownership exemption when the owner sells a portion of the company to a non-exempt entity, you are no longer exempt and must file.  

Note: You must file an updated report within 30 days of failing to meet the exemption criteria.


Question 8: If you don’t qualify for an exemption, what information must be filed?

Dawn Holland: The CTA requires each entity to file a report disclosing certain information for each of their “Beneficial Owners” and “Company Applicants” (we’ll get into those definitions in a minute): 

(1)   Full Legal Name

(2)   Date of Birth

(3)   Current Address (residential or business)

(4)   A unique identifying number and issuing jurisdiction from an acceptable identification document. (eg. US Passport or driver’s license)

Also note, in lieu of this information, the individual can apply for a FINCEN Identification Number.


Question 9: What is a FinCEN Identification Number?

Dawn Holland:  A person (or entity) can submit an application to FinCEN for a unique number and once they receive it, they can use that in lieu of the information we just went over (since FinCEN will already have that on file). It is an attempt to streamline the process for individuals or entities who will be regularly involved in reporting. If their information changes, they must update with FinCEN within a specified time period (I believe it is going to be 30 days for an update). Primary motivators for obtaining a FinCEN ID # will be data security concerns and administrative efficiency.


Question 10: Does the entity itself need to provide any financial information?

Dawn Holland:  No, there is not a requirement for any financial or business information from the entities themselves. They do need to provide some basic details such as the Company Legal Name, any DBAs, Business Address, Jurisdiction of Formation (or date of registration for foreign entities), and IRS Tax ID Number.


Question 11: What are Beneficial Owners and Company Applicants?

Dawn Holland:  The definition of Beneficial Owners is fairly broad and includes any individual who directly or indirectly either exercises substantial control over the company or owns at least 25% of the company.  

“Substantial control” is key, and it includes senior officers and anyone else who can appoint or remove senior officers or a majority of the board or anyone that directs company decisions.

Definitely review the requirements as there are some examples.For example, the term ‘‘senior officer’’ means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function) AND includes some exemptions as well (minor children, acting agents, employees whose control is derived solely from employment status if they are not a senior officer, etc. 

The big takeaway is that you don’t have to be just an equity owner to be considered a beneficial owner under this definition. This is different from other regulatory reporting for Beneficial Owners.

You also have to provide information for Company Applicants; this is simply the individual who directly files the document that creates the entity. Should be easy, right? Not so fast – it also includes the person primarily responsible for directing or controlling the filing if more than one person is involved. So, this could rope in third-parties like attorneys, paralegals, and corporate services firms. The good news is that entities created prior to January 1, 2024, don’t have to include Company Applicant information. But for new entities, be mindful that there could be more than one company applicant, and they could be individuals outside of your organization.


Question 12: What are some potential compliance roadblocks people may face?

Dawn Holland: The biggest issue is finding a way to organize and manage all of your reporting information, as well as tracking the required updates and the filing deadlines. 

Organization is key, and using a software solution like EntityKeeper with automated reminders and a place to store entity and owner/applicant information is going to be essential. 

Also, designating someone within your organization to be responsible for CTA compliance is a very good idea – especially if you have lots of entities or you are using the catch-all exemption and are close to the $5M gross receipts or 20 employee requirements. You need to ensure that information is being tracked so that you can file immediately if you are out of compliance. 


Question 13: What are the Corporate Transparency Act non-compliance risks?

Dawn Holland: There are a range of penalties from daily fines to criminal sanctions. Obviously, we have yet to see how they will be enforced. Just know that non-compliance can have significant legal, financial, business, and reputational impacts on your company. And it is important to note that reporting companies, beneficial owners, and company applicants can all potentially be liable.


Question 14: What steps can be taken to avoid or mitigate compliance risks?

Dawn Holland: My best advice is to start now. Appoint someone within your organization to handle CTA compliance and have them start collecting information and gathering documents for your existing entities now.

Create a plan for how you will track information going forward. And then, as you form new entities, be ready to identify the Beneficial Owners and Company Applicants immediately. Gone are the days where you create an entity and decide how it will fit into your corporate landscape later – this all needs to be done on the front end now. 


Question 15: Any recent developments we should know?

Dawn Holland: Recently, the comment period ended for the application used to collect beneficial ownership information. There were some lengthy and thoughtful comments.

One major concern is around allowing reporting companies to respond “unknown” to virtually every field that the statute requires. We are not sure where that came from, but the proposed form has virtually no instructions on the type of due diligence reporting companies must undertake to find the statutorily-required information before answering “unknown.” The ability to answer “unknown” to required fields would encourage bad actors to sidestep the entire reporting regime.

In addition, several senators recently  submitted a comment to FinCEN raising concerns that the CTA strays from Congressional intent and erects unnecessary and costly barriers to accessing beneficial ownership information that risk undermining the utility of the directory. So I thought that was interesting, especially since it was a bipartisan group (both Marco Rubio and Elizabeth Warren were signatories). 

The senators encouraged FinCEN to revise the rule and asked for several adjustments – mainly pertaining to access to and use of the information by authorized recipients, verification of Beneficial Ownership info to ensure it is accurate, and training materials to help authorized recipients request and access information.

So, they were not concerned about the burden to us as filing companies but instead were worried that state and local law enforcement, as well as financial institutions and Treasury Officials, have access to information without jumping through too many hoops.

Stay tuned for more updates, there will be important clarifications and guidance unveiled over the coming months.


Question 16: How Can EntityKeeper Help with CTA Compliance?

Dawn Holland: One important reason to find an entity management solution like EntityKeeper, in addition to keeping you organized and on top of deadlines, is that it will securely store your information. You probably noticed that the information that will be provided under the CTA is personally identifiable information, so it will need to be safeguarded. Ideally, as we find out more about how the filings will work mechanically, these software solutions will be able to facilitate filing and updating CTA information with FinCEN directly, but having capabilities to store information securely is extremely important to every organization.

Note, several states are following suit and trying to beef up their beneficial ownership requirements during the filing process, so we may see this trickle down into the state filing realm as well. 


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. Schedule a demo today to avoid noncompliance penalties and fines!