Effective January 1, 2024, the Corporate Transparency Act (CTA) imposes uniform beneficial ownership information reporting requirements on certain kinds of entities created in the United States or registered to conduct business in the US as of that date. The Act is expansive and could apply to certain estate plans or asset protection plans of individuals who use corporations, limited liability companies (LLCs), certain trusts, or other entities to own certain of their assets or interests.
Purpose of the Act. Congress enacted the CTA as part of the National Defense Authorization Act in 2021, intending to curb abuses and fraud that can accompany the use of anonymous forms of entities and fictitious business names in the US. Congress created the Financial Crimes Enforcement Network (FinCEN) to collect information on certain entities, or “Reporting Companies” subject to the Act, to enforce this expansive new law.
CTA Applies to What Kinds of Companies? The CTA and the regulations issued under it require entities that it defines as Reporting Companies to submit reports to the FinCEN that contain information about those entities and that identify two groups of individuals affiliated with those entities: (a) the Beneficial Owners of Reporting Companies, and (2) individuals who have filed applications in 2024 or after to form a Reporting Company or to register it to do business.
For purposes of the Act, a Beneficial Owner of a Reporting Company includes any individual who directly or indirectly: (1) exercises substantial control over the Reporting Company or (2) owns or controls at least 25 percent of the ownership interests in the Reporting Company.
The laws defining Reporting Companies subject to the reporting requirements of the CTA are complex, as are the 23 kinds of companies the law defines as exceptions to the requirements. A thorough understanding of this momentous legislation is necessary to determine the applicability and scope of its requirements to your particular situation.
Aside from any operating businesses, many wealthy individuals use corporations, LLCs, partnerships, trusts, and other reporting companies to manage assets and investments, effectuate estate planning transfers and other gifting, and maintain family privacy as to such assets. The CTA will affect many of these individuals, given that many such entities and other planning vehicles fail to meet any of the 23 exceptions to the definition of Reporting Company under CTA; those entities will be required to comply with the CTA.
Must a trust owning a partial interest in a Report Company comply with the Act: Where a trust—regardless of whether its chief purpose is that of estate planning—has substantial control over a Reporting Company or owns or controls at least 25 percent of the ownership interest in the Reporting Company, the CTA law “looks through” the trust and requires the reporting of information as to the identity and address/contact information of the trustee or trustees, and, in certain situations, the beneficiaries and the settlor (creator) of the trust.
Must a private foundation or charitable trust comply with the Act? Tax-exempt entities, including private foundations, charitable trusts, and split-interest charitable trusts, are generally not included in the definition of Reporting Companies under the CTA. However, such a charitable organization that loses its tax-exempt status and does not have it reinstated within 180 days of revocation will fall within the definition of a Reporting Company and must comply with applicable reporting requirements.
Filing Deadlines. Reporting requirements fall into two filing phases:
- Reporting Companies created prior to January 1, 2024, must file by January 1, 2025.
- Reporting Companies created on or after January 1, 2024, must file within 30 days of registering
as a business entity.
FinCEN will not accept applications until January 1, 2024.
Penalties for Non-Filing and Other Violations. Certain violations of the CTA’s filing requirements could subject responsible parties to civil and criminal penalties. Specifically: (1) willful failure to file with FinCEN a complete or updated report or (2) willfully providing or attempting to provide a report containing false or fraudulent information is subject to a civil penalty of a fine or up to $500 per day (with a cap of $10,000 per violation) and a criminal penalty of imprisonment of up to 2 years.
The Corporate Transparency Act is complex legislation that will apply as of January 1, 2024, to many entities, assets, and also to certain individuals who use or are planning to create certain corporations, LLCs, partnerships, trusts, or other entities in their estate plan, tax planning, asset protection structures, or other planning vehicles.
