In January 2021, the U.S. Congress passed the Corporate Transparency Act (CTA), a groundbreaking federal law designed to enhance transparency within the corporate world. The CTA mandates that numerous business entities disclose to the Treasury Department the identities of individuals who hold a significant stake of 25% or more in the entity or exercise substantial influence over its operations. The primary goal of the CTA is to uncover entities that might be involved in money laundering and other illicit activities, thereby curbing financial wrongdoing.
In a significant move, the Treasury issued final regulations for implementing the CTA on September 30, 2022. These regulations will come into effect starting January 1, 2024. This has prompted businesses and their advisors to prepare for compliance in advance. Here are some key aspects that business owners and their advisors should be aware of:
- New Federal Filings in 2024: Starting in 2024, entities with less than $5 million in annual U.S. revenues or fewer than 20 U.S. full-time employees are generally required to file new federal information reports. Although this requirement encompasses many business entities, it’s worth noting that certain affiliated entities might not meet these criteria. Entities established prior to 2023 have until January 1, 2025, to file, while those formed after 2023 must file within 30 days.
- Exemptions: Several entity types, such as public companies, tax-exempt entities, and partnerships, are exempt from the CTA. Entities with over $5 million in annual revenues, 20+ full-time employees, and a U.S. office for conducting business also enjoy an exemption, although affiliated entities may not qualify.
- Penalties: The CTA enforces severe criminal and civil penalties for knowingly failing to report accurate information.
- Identifying Information Reporting: Entities must provide information about individuals involved in entity ownership or control. This includes individuals who own interests in the entity directly, indirectly through another entity, or who hold positions as senior officers. The criteria for who falls under this category are intentionally broad and open-ended, which can lead to uncertainty in certain cases.
- Information Required: Entities must provide comprehensive details about individuals, including full legal names, residential addresses, date of birth, and official identification numbers. Copies of identification documents featuring a photograph of the individual are also mandatory.
- Confidentiality: Information submitted to the Treasury remains confidential and is employed exclusively for law enforcement and national security purposes. This ensures that ownership details of entities in states like North Carolina and Delaware remain private.
- Alternate Identifying Numbers: Individuals can obtain a “FinCEN identifier” from the Treasury, which entities can use in lieu of personal information for reporting.
- Timely Reporting of Changes: Any alterations in the individuals requiring reporting or in their identifying information must be reported within 30 days. Consequently, entities need to establish mechanisms to track these changes effectively.
- Amendments to Organizational and Employment Documents: Entities should contemplate amending their organizational and employment documents to stipulate that relevant individuals provide the necessary information for compliance. Encouraging affected individuals to obtain a new identifying number from the Treasury can also streamline the reporting process for changes in their information.
The CTA introduces a range of new reporting and record-keeping requirements for affected businesses. If you are using LLCs to buy real estate, just know that there is one more reporting requirement for you as well, and if we are handling the LLC for you we will handle all of that reporting for you.