Corporate Transparency Act: 2024 Guide
By the Business Law Centre at Hutchinson Cox
If you talked to a business attorney or CPA recently, you might have heard about the Corporate Transparency Act (“CTA”). In this article, we’ll provide comprehensive information to help you wade through the legal jargon and hype.
What is the Corporate Transparency Act?
The United States Legislature passed the Corporate Transparency Act in 2020 to combat financial crimes (like money laundering and terrorist financing), by requiring companies to report personal information for the individuals who benefit from the company (otherwise known as “Beneficial Owners”) to FinCEN, which is a bureau of the U.S. Department of the Treasury.
Even though the CTA was passed in 2020, the requirements only became effective as of January 1, 2024. The CTA’s goal is to reduce the number of shell entities operating in the United States. Previously, there had been no easy way for law enforcement to verify the identities of the individuals who actually benefit from an entity’s activities. Under the CTA, most kinds of businesses and other legal entities must report information about their Beneficial Owners to the Financial Crimes Enforcement Network (“FinCEN”), a branch of the U.S. Department of Treasury.
Legal entities now regulated by the CTA must disclose accurate, up-to-date information for their Beneficial Owners such as full legal names, dates of birth, residential addresses, and unique identification numbers (like a driver’s license number). Information reported to FinCEN will be kept confidential for use only by authorized law enforcement agencies or the financial institutions granted permission directly from a reporting company. Corporate Transparency Act reporting obligations vary for existing and new companies, and the CTA includes harsh penalties for non-compliance ranging from fines to imprisonment.
Compliance with the CTA is straightforward, but because the penalties can be severe, it is crucial for any business owner to understand their obligations.
Reporting Companies that already existed before January 1, 2024, have until January 1, 2025, to report their Beneficial Owner information to FinCEN. New Reporting Companies formed between January 1, 2024, and January 1, 2025, have 90 days to report Beneficial Owner information. Reporting Companies formed after January 1, 2025, only have 30 days to report.
Don’t delay getting in touch with us to find out how this new legislation pertains to you, as you may have a limited time to comply. Book a consultation with us today!
To make it easier for you to see when your business needs to file its CTA report, we’ve created a downloadable chart.
To access more information, continue reading and visit the FinCEN’s website FAQs. And if you would like a more in-depth explanation of the CTA, continue reading below.
Corporate Transparency Act Covered Entities
The CTA targets corporations, limited liability companies (LLCs), and similar entities that are created by registering the entity with a state’s secretary of state. Those entities are considered “Reporting Companies” under the CTA.
The CTA requires all Reporting Companies to report information about the companies themselves and each Beneficial Owner of the Reporting Company. If a Reporting Company gets created after January 1, 2024, the Reporting Company must also report information about the Reporting Company’s “company applicants.”
Corporate Transparency Act Exemptions
The CTA has exemptions for certain types of entities, such as publicly traded companies, financial institutions, and certain regulated entities that are already required to disclose significant amounts of information to the government.
Corporate Transparency Act Penalties
Failure to comply with the reporting requirements of the CTA may result in civil and criminal penalties, including fines of up to $500 a day and imprisonment. Deliberate or willful misrepresentation of beneficial ownership information can lead to additional penalties.
Corporate Transparency Act Reporting Requirements
The CTA requires all Reporting Companies to disclose personal information to FinCEN on each of its Beneficial Owners. Required information includes each Beneficial Owner’s full legal name, date of birth, current residential address, and a unique identifying number (such as a driver's license or passport number). The information provided must be accurate and up to date.
The CTA defines a Beneficial Owner as an individual who meets one or more of the following criteria:
Ownership Interest: Any individual who directly or indirectly owns 25% or more of the equity or other ownership interests in a business entity. The CTA is intended to capture a broad range of individuals, and it defines “ownership interest” broadly to achieve that goal. Ownership interests can be through shares, voting rights, or any other ownership structure.
Substantial Control: Any individual who exercises substantial control over the business entity. Again, because the CTA is meant to be a broad law, “substantial control” goes beyond the traditional leadership roles in a company. Substantial control refers to the power to direct or influence the management or policies of the entity through ownership interests, voting rights, agreements, or any other means of exercising authority over a Reporting Company.
Management Authority: Any individual who holds significant managerial responsibility in the business entity is also likely a Beneficial Owner of a Reporting Company. This includes individuals such as CEOs, CFOs, presidents, or other similar positions responsible for the day-to-day operations and decision-making of the entity. These individuals must report as Beneficial Owners because they have “substantial control” over a Reporting Company.
It is worth noting that the CTA focuses on identifying individuals who have significant control or ownership interests in a business, with the aim of increasing transparency and preventing the misuse of corporate structures for illicit purposes. The definition of Beneficial Owner provided above helps determine which individuals need to be reported to FinCEN as part of the CTA's reporting requirements.
Many companies are controlled by other companies instead of individuals, but individuals cannot escape the CTA’s reporting requirements just by using several companies. Instead, the CTA requires the company who controls the other company to report their own Beneficial Owners.
This can be confusing, and an example can help illustrate. Let’s say Company A is just a holding company owned by Company B. Company B has one Beneficial Owner, Polly President. If Company A is a Reporting Company, it can’t get away with only disclosing “Company B” as the beneficial owner. Instead, Company A has to report Polly President’s information as Company A’s Beneficial Owner, because Polly President exercises “substantial control” over Company A by owning Company B.
If a Reporting Company was created after January 1, 2024, the Reporting Company must also report information about the Reporting Company’s “Company Applicants.”
Here's what the CTA requires Beneficial Owners, Reporting Companies, and company applicants to report:
Beneficial Owners (for each Beneficial Owner):
Full Legal Name.
Date of Birth.
Current Residential Address.
Unique Identifying Number, such as a driver's license or passport number, and an image of the identification document (like a passport) itself. This helps establish the identity of the individuals involved.
It's important to ensure that the information provided is accurate and up-to-date. The purpose of collecting this information is to increase transparency and prevent individuals from using companies to engage in illicit activities such as money laundering, terrorist financing, or other financial crimes. Reporting Companies have to update information reported to FinCEN within 30 days of the information changing.
Reporting Companies:
Legal Name: The complete legal name of the business entity as shown in the secretary of state’s records.
Any Trade Names (for example, a “d.b.a.”).
Business Address. The current street address of the business entity's principal place of business or primary U.S. address if the principal place of business is outside of the U.S.
The jurisdiction of formation or registration (for example, the state of Oregon).
Taxpayer Identification Number or foreign equivalent with the name of the foreign jurisdiction.
Reporting Trustees:
If a trustee represents a trust that qualifies as a beneficial owner by directly or indirectly owning or controlling 25% or more of the equity interests in a Reporting Company, the reporting requirements include:
Legal Names: The full legal name of the trustee and any other individuals who have control over distribution or withdrawal of the assets in the trust.
Beneficiaries: Beneficiaries also need to be reported if the beneficiary is the sole permissible recipient of income and principal of the trust or if a beneficiary has the power to direct the distribution or withdrawal of substantially all of the assets.
Settlor: A Settlor also must be reported if the Settlor has the right to revoke the trust or withdraw the assets of the trust (this includes the authority to swap assets with the trust).
Address: The address where the reporting individuals can be contacted.
Unique Identifying Number: A unique identifying number for the trustee, such as a Social Security number or other applicable identification.
Company Applicants:
A “company applicant” is the individual who files the document creating the Reporting Company. If a second person is primarily responsible for directing the first person to file the document creating the Reporting Company, the second person is also a “Company Applicant” under the CTA. For example, if an attorney helps a client organize a limited liability company by directing their legal assistant to file articles of organization with the secretary of state, both the attorney and the legal assistant are “company applicants.”
Companies formed after January 1, 2024 (or foreign entities registering in the U.S. for the first time after that date), must report “Company Applicant” information to FinCEN. The information required is the following, for each company applicant:
Full Legal Name.
Date of Birth.
Address, which can be a residential or business address.
Unique Identifying Number, such as a driver's license or passport number, and an image of the identification document (like a passport) itself. This helps establish the identity of the individuals involved.
Corporate Transparency Act Privacy
Rest assured, the information reported to FinCEN will be confidential and accessible only to authorized government agencies for law enforcement and national security purposes. The information will not be publicly available, protecting individuals' privacy. FinCEN is still developing rules (as of December 2023) for how FinCEN will allow access to the information reported under the CTA to government and foreign law enforcement officials. It is likely Reporting Companies will be able to voluntarily authorize certain financial institutions to view their Beneficial Ownership information, as well.
What is a FinCEN ID?
FinCEN will allow individuals to request a “FinCEN ID” that individuals can use instead of reporting the beneficial owner information described above. The application for a FinCEN ID can be found on the FinCEN website. Getting a FinCEN ID makes the most sense for individuals who must report information to FinCEN on a regular basis. For example, a business attorney who has to repeatedly report as a “Company Applicant” may wish to obtain a FinCEN ID to speed up the process.
How to File Your Corporate Transparency Act Report
The reporting process is done exclusively via digital platforms. FinCEN’s electronic filing system is currently available on the FinCEN website. There is no indication that paper applications will be allowed, so Reporting Companies should familiarize themselves with the electronic system
The Corporate Transparency Act can seem complicated and even a bit scary. Fortunately, the business attorneys at Hutchinson Cox are prepared to assist you every step of the way. Don’t delay getting in touch with us, as you may have a limited time to comply. Book a consultation with us today!
The information provided here does not constitute legal advice. Hutchinson Cox makes neither express nor implied warranties regarding the use of this material. The reader should always seek competent legal advice as the facts of every case vary.