Corporate Transparency Act Mandates Stricter Federal Disclosures

The Corporate Transparency Act (CTA), enacted on January 1, 2021, mandates new federal beneficial ownership disclosures for certain companies. These new disclosures aim to counter illicit activities. Affected companies must report designated information to the Financial Crimes Enforcement Network (FinCEN) starting January 1, 2024.

Who is Required to Report Under the Corporate Transparency Act?

The CTA requires “reporting companies” to file reports with FinCEN identifying the company’s beneficial owners (and certain other information). A reporting company is defined to include most entities formed under state law, like LLCs, LLPs, and corporations.

Beneficial ownership generally means any of the following:

• People with substantial control
• People with ownership interests, whether indirect or direct, equal to at least 25% of the company’s equity interests
• Company applicants

There are numerous exemptions—meaning an entity is not a “reporting company”—including:

• Banks, bank holding companies, credit unions, governmental entities, publicly traded companies, insurance companies, public accounting firms, and tax-exempt entities.
• “Large operating companies” that have a physical office in the U.S., more than 20 U.S.-based, full-time employees, and more than $5 million of gross receipts reported on a prior federal tax return.

A reporting company could be related to another reporting company (for example through ownership), complicating the beneficial ownership disclosure. These final regulations allow a reporting company, under certain circumstances, to use a “FinCEN identifier to report the beneficial ownership of certain related entities.”

Allowing a reporting company to disclose the related company’s FinCEN identifier number, rather than requiring the reporting company to disclose the related company’s beneficial owners, may improve efficiencies (although FinCEN must release further details on this process, including how a company obtains a FinCEN identifier number).

When Do Companies Need to Report Under the Corporate Transparency Act?

Existing reporting companies must file with FinCEN between January 1, 2024, and January 1, 2025. Originally, CTA regulations required new reporting companies formed on or after January 1, 2024, to file their FinCEN reports within 30 days of formation (and face penalties for late filings).

Final Regulations extend this deadline from 30 to 90 days for new reporting companies formed on or after January 1, 2024, and before January 1, 2025.

Presumably, new reporting companies formed on or after January 1, 2025, will be subject to the original 30-day deadline. Reporting companies in existence before January 1, 2024, generally can file their FinCEN reports between January 1, 2024, and January 1, 2025.

What Information is Reported under the Corporate Transparency Act?

A reporting company is required to disclose its full legal name, address, FEID, and state of jurisdiction. Additionally, it must also disclose the following information for any beneficial owners:

• Legal name
• Date of birth
• Address
• A unique identifying number¬—such as a driver’s license or passport number—including a scanned copy of the form of identification

What Happens if A Company Doesn’t Comply?

Failure to comply with the CTA can result in a $500-per-day penalty (up to $10,000) and possible criminal penalties.

Next Steps for CTA Required Reporting Companies

The CTA does not directly involve the IRS, and no CTA disclosures are required with any federal or state tax filings. Therefore, accounting firms and other tax return preparers are not generally responsible for any client FinCEN filings.

The government released a Frequently Asked Questions page providing answers to common CTA questions and reporting companies should monitor this site (and similar sites) for further guidance and information.

We advise companies affected by the CTA to potentially seek legal counsel for assistance with these new filing requirements.