Overview of the Corporate Transparency Act

New Information Reporting Requirement for Certain Small Businesses and Startups

A little-known legislative provision passed in early 2021 may be imposing a widespread information reporting requirement on a significant number of US-based and inbound foreign entities in the near future. The Corporate Transparency Act (CTA) was passed in January of 2021 as part of the National Defense Authorization Act of 2021 (NDAA). The CTA provision of the NDAA represents an anti-money laundering initiative by requiring entities with the potential to be considered anonymous shell companies to report information regarding beneficial ownership.

What Entities Need to Comply with CTA?

Any entity organized in the United States as a corporation, limited liability company, or other similar entity created under an operation of state law, as well as any foreign entity registered to do business in the United States is potentially affected.  There are several exceptions however, notably the following:

• Publicly traded companies
• Companies with over 20 full-time US-based employees, operating from a physical location in the US, and reporting (on a filed tax return) over $5 million in gross revenues
• Many financial institutions that report to and/or are regulated by government agencies
• Churches, charities, and nonprofit organizations

Entities that do not meet any of the statutory exceptions will be required to file a report with the Financial Crimes Enforcement Network (FinCEN) that discloses the entity’s beneficial owners. This report will need to be filed annually to reflect any changes in beneficial owners.

Where Does the Required CTA Reporting Information Go?

According to the CTA, FinCEN must store all information received from reporting entities on a private database that is not accessible to the public, and it cannot be released under a Freedom of Information Act (FOIA) request. The information can only be used for law enforcement, national security, or intelligence purposes.

Timing for Corporate Transparency Act Compliance

With the NDAA’s passage on January 1, 2021, the Secretary of the Treasury has one year to issue regulations related to the CTA. The effective date of the soon-to-come regulations will determine the exact filing deadlines for reporting companies. After an initial submission, affected entities will be required to issue subsequent reports to reflect any changes to previously-reported information.

Penalties for Corporate Transparency Act Non-Compliance

While more information will likely be coming in CTA regulations, we currently know that CTA violations carry civil penalties up to $500 per day that the violation continues and criminal fines up to $10,000 and/or two years of imprisonment. The CTA also contains significant penalties for unauthorized disclosure of information collected under the CTA by either a government employee or a third-party recipient of information collected under the CTA.

What is the Impact of CTA on Small Businesses and Startups?

The CTA represents a significant development in the prevention of illicit activities conducted through business entities, it also places a significant administrative and compliance burden on small businesses. The framework for the CTA has been released via passage of the NDAA and it is expected that forthcoming regulations will contain significantly more detail on the compliance process, affected entities, and procedural steps. In the meantime, it is important for beneficial owners and managers of entities that may presumably be affected to monitor ongoing developments.

For more information, the American Bar Association’s Business Law Today publication provides additional details of the CTA which may be useful to affected entities.

Questions on how to meet the CTA reporting requirement for your business? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000

Sources

• https://www.jdsupra.com/legalnews/the-corporate-transparency-act-to-take-7949272/

• https://www.natlawreview.com/article/what-you-need-to-know-about-corporate-transparency-act