Is Your Company Ready for the Corporate Transparency Act?

In 2021, Congress passed the Corporate Transparency Act (CTA). The CTA is a bipartisan anticorruption law intended to thwart people from using corporations or limited liability companies formed under state law for illegal activities like money laundering, human and drug trafficking, and many flavors of fraud. The law also imposes a new federal reporting requirement on business entities, both existing and newly formed, when it becomes effective on January 1, 2024.

The CTA includes a vocabulary list of new terms that are key to understanding obligations under the law. At its most basic, the CTA requires a “reporting company” to report its “beneficial ownership information” to the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN). The CTA defines a “reporting company” to include the following:

“…a corporation, limited liability company, or other similar entity that is— ‘‘(i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or ‘‘(ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe …”

Note that sole proprietorships and partnerships are not reporting companies. An entity can meet the requirements of a “reporting company” in the definition above and still not be subject to the CTA reporting requirements if it falls under the CTA’s list of exceptions.

A “reporting company” must report its “beneficial ownership information” to FinCEN. An entity formed after January 1, 2024, must report this information within 90 days of formation. Entities in existence before January 1, 2024, have a full year – until January 1, 2025 – to file a report with FinCEN. What is “beneficial ownership information?” The CTA defines “beneficial owner” to mean:

“… with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise— ‘‘(i) exercises substantial control over the entity; or ‘‘(ii) owns or controls not less than 25 percent of the ownership interests of the entity…”

If a company is a reporting company, it must report the identity of any individual who exercises “substantial control” over it or who owns 25 percent or more of the ownership interest in the entity.

Many small businesses will need to take action to comply with the CTA’s reporting requirements in 2024. FinCEN has published a free online Small Entity Compliance Guide for helping small businesses meet their compliance obligations.