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What is the Corporate Transparency Act and why was it passed?

The Corporate Transparency Act will affect millions of small businesses, yet reading the full version would take several hours and possibly a law degree. So here’s a series of articles to make the CTA more understandable.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) was ratified on January 1, 2021, as part of the 2021 National Defense Authorization Act (NDAA), as part of the Anti-Money Laundering Act (AMLA)of 2020, to deter criminals from infusing their illicit funds into the U.S. financial system. While legitimate businesses play a pivotal role in the economy, they can be used to launder illegal proceeds, from activities like human trafficking, drug and arms dealing, and terrorist financing.  The CTA’s purpose is to put names behind business faces and thereby make money laundering trickier.

What does the Corporate Transparency Act require companies to do?

Certain companies will now be required to file a report with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), disclosing the following information:

  1. Company’s full name
  2. Any trade name or DBAs
  3. The business street address
  4. Jurisdiction of formation
  5. IRS taxpayer ID

In addition, they must report each beneficial owner and company applicant’s:

  1. Name
  2. Birth date
  3. Address

A unique identifying number from an official document (passport or state-issued driver’s license)

A “beneficial owner” is an individual who directly or indirectly:

  1. Exercises substantial control over the reporting company (senior officers, those with practical authority) OR
  2. Owns or controls at least 25% of the reporting company’s ownership interests

A “company applicant” is:

  • the individual who “filed the application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe” (Foley & Lardner LLP)
  • the person who registers the company to conduct business in the United States (for foreign businesses).

Which companies need to file?

According to the CTA, any (1) U.S. corporation created by, or (2) foreign corporation registered in the U.S. by, the filing a document with the secretary of state or a similar office under the law of a State or Indian Tribe.

Confusing, right? It’s actually easier to figure out which companies need to file by pinpointing which ones don’t. Here’s the list of CTA exceptions (already subject to federal and/or state regulation):

  1. Large operating companies (> 20 full-time U.S. employees; > $5m in gross sales; operate from a physical office in U.S.)
  2. Securities issuers
  3. Banks
  4. Insurance companies and producers
  5. Brokers or dealers in securities
  6. Registered investment companies and advisers
  7. Venture capital fund advisers
  8. Accounting firms
  9. Tax exempt entities (or those assisting tax exempt entities)
  10. Special pooled investment funds

If you’re still not sure whether you need to report, try taking a free quiz here.

What are the penalties for not filing?

Any party found guilty of intentional non-compliance may accrue fines of maximum $500 for each day they deliberately don’t report. They can accumulate fines of up to $10,000 and/or be sentenced to two years in prison.

In the next article, we’ll dive into the information that needs to be reported on a beneficial ownership report.