The Corporate Transparency Act (the "CTA") takes effect on January 1, 2024, and imposes federal reporting requirements for certain legal entities, the people who beneficially own or control such entities, and the people who formed such entities. The main goal of the CTA is to enhance transparency and combat financial crimes, such as money laundering, terrorist financing, and tax evasion, by requiring certain companies to disclose their “Beneficial Owner” information to the U.S. government.
The Act primarily targets reporting companies, which are defined as corporations, limited liability companies (LLCs), and similar entities that are registered or formed under U.S. state laws. It aims to address the issue of anonymous shell companies that can be misused for illegal purposes by revealing the individuals who ultimately own or control these entities. Information is to be reported to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network ("FinCEN"), which will manage the database.
Both domestic and foreign companies, such as: corporations, LLCs, LPs, LLPs, or certain business trusts, among others. Reporting trusts are those that have substantial control over a reporting entity.
Who does not need to report?
Both domestic and foreign companies, such as: sole proprietorships, GPs, certain trusts (but may still have to report as beneficial owners), public or large operating companies, tax-exempt entities, pooled investment vehicles, among others. There are at least 23 entities exempt, such as companies already subject to stringent reporting and disclosure requirements (e.g., publicly traded companies) and certain financial institutions.
Who is a "Beneficial Owner"?
Beneficial owners are individuals who directly or indirectly own or control at least 25% of the ownership interests in the company or exercise substantial control over it.
What information gets reported?
What is the filing deadline?
New reporting companies created after January 1, 2024 must file this information with FinCEN within 30 days of their formation, while existing companies have until January 1, 2025 to file their report. After the initial report is filed, any changes or corrections to the information on file must be reported within 30 calendar days. Otherwise, there are no ongoing filing requirements. FinCEN has indicated that the dissolution or termination of a company does not in itself require an updated filing.
Who will have access to this information?
The CTA mandates that FinCEN maintain the reported beneficial ownership information in a secure, non public database. It is only accessible to a government agency, law enforcement, or financial institutions for compliance with anti-money laundering or other diligence obligations.
What are penalties for failure to report?
The CTA levies civil penalties of up to $500 per day, capped at $10,000 and there may be criminal penalties applied in the form of up to a $10,000 fine, imprisonment of up to two years, or both.
The Corporate Transparency Act is seen as a significant step in the U.S. government's efforts to combat financial crimes and promote greater transparency in the corporate sector. By identifying the true owners of companies, law enforcement agencies can better investigate and prevent illicit activities associated with anonymous corporate structures. While we are still awaiting final guidance on reports and how to upload them to FINCEN, in the meantime, if you would like to discuss the CTA requirements and determine how they apply to your particular situation, please contact us at Hollow Brook.
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Disclaimer: Information provided is for educational purposes only. HBWM does not provide tax, legal, compliance, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, HBWM makes no warranties with regard to such information, or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.