June 15, 2021
By Louann Bronstein, as published in Legal Newswire
The Corporate Transparency Act (CTA) was enacted on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021. However, the CTA will not become effective until the Department of Treasury enters its regulations, which must occur by January 1, 2022.
The CTA is groundbreaking. It creates a national database to register corporations and limited liability companies. Though not specifically mentioned, limited partnerships likely will be required to register as well, on the basis that the CTA requires the registration of “other entities created by filing a document with the secretary of state of the relevant state”.
The CTA’s purpose is to target anonymous shell companies to address and prevent money laundering, terrorism funding, trafficking, tax evasion, and similar illegal activities. However, due to the business size component of the CTA, many legitimate small businesses will be required to register.
With some exceptions for highly regulated industries, the CTA requires reporting by any corporation, limited liability company, or filing company unless it satisfies all the following:
- Employs more than 20 full-time employees in the US; and
- Filed in the previous year federal income tax returns demonstrating more than $5 million in gross receipts in the aggregate; and
- Has an operating presence in the US.
Many local and regional businesses will be required to file a report once the Treasury regulations are issued. Even though the business may have an office (or other operating presence) in the US, many small businesses will have fewer than 20 full-time employees or less than $5 million in gross receipts.
There is no exception for existing entities. Further, unless clarified by the Treasury regulations, it appears that all newly formed corporations, limited liability companies, and filing companies will be required to register, because a new entity will not have filed a previous year federal tax return.
Entities formed before the Treasury regulations are issued will have two years to file the report. The reporting requirement will be immediate for entities formed after the Treasury regulations are issued.
The CTA requires that certain identifying information be reported for each “beneficial owner” of a reporting company. A beneficial owner is any individual who, directly or indirectly:
- Owns or controls 25% or more of the ownership interest of the entity; or
- Exercises “substantial” control over the entity; or
- Receives “substantial” economic benefits from the assets of the entity.
“Substantial” is not defined in the CTA. This is one of the ambiguities the Treasury regulations are expected to clarify.
Each beneficial owner will be required to report identifying information, including:
- date of birth,
- current business or residential street address, and
- unique identifying number, such as a passport, driver’s license, or state issued ID number.
The CTA provides significant penalties for failing to file a report or providing false information. These penalties include monetary fines up to $10,000, two years in prison, or both.
The CTA also provides safeguards to protect the disclosure of information in the database. The general public will not have access to the database, and the information will not be subject to the Freedom of Information Act. In support of the CTA’s purpose, the information will be available to law enforcement agencies, federal agencies for national security, federal regulatory agencies (such as the IRS), and financial institutions, in each case following strict regulatory protocols.
For a quick PDF overview of the Corporate Transparency Act, download Beneficial Ownership Disclosure Requirements: Fast Facts
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