The Corporate Transparency Act is Taking Effect – Part 1
Two and half years ago, Congress passed a law that would not take effect for three years. Many people did not pay attention to this law, since it did not affect anyone at the time, even though the law would affect nearly all business entities in the country. The law is set to take effect six months from now, and businesses and attorneys need to be aware and prepare for a new set of mandatory government regulations.
The name of the law is The Corporate Transparency Act (CTA).1 The purpose of the act is to address illegal activity by people who have been concealing their actions through their ownership of corporations, LLCs, other corporate entities, and other similar shell companies. In order to address this issue, Congress enacted a law which is applicable to all businesses, including corporations, LLCs, LLPs, and most other business entities.
The requirements are extensive, so this article will only cover part of the act. A future installment will address more details. This section will cover:
- Why the act exists
- Which entities must file
- Who must file on behalf of each entity
- What entities are exempt from filing
- When the filings must occur
The CTA was enacted in order to enable the government to monitor companies and entities for possible money laundering, corruption, tax fraud, terrorism, illegal trafficking, and other similar illegal activities. The United States is behind the times in this area. Many other countries have similar laws, including Canada, the UK, and many European countries.
In order to address the aforementioned issues, Congress will now be requiring the following entities to file documents with the government: any domestic company which is a corporation, an LLC, or any entity created by filing a document with a Secretary of State. This will also include LLPs, family partnerships, limited partnerships, and business trusts. Even single person LLCs will be required to file. Also included are companies which are formed in a foreign country but which are registered to do business in any state.
However, like all laws, there are exceptions. Specifically, in this case, there are 23 exceptions. Most of the exceptions apply to companies that are already regulated, such as banks, public utilities, tax exempt entities, accounting firms, companies registered with the SEC, companies registered with the Commodities Exchange, and large operating companies. A large operating company is a company with 20 or more full-time US employees, more than $5,000,000 in US source revenue, and a physical operating presence in the US. Additionally, most small businesses will need to file, including most small stores and family businesses. This could also include, for example, a family who buys a home as an investment, and sets it up as an LLC.
For companies which are required to file, those which were formed on or before January 1, 2024 must file the appropriate forms beginning January 1, 2025. Companies formed after January 1, 2024 must file within 30 days of the date the company was created. This first date is six months from now. As such, anyone planning to start a new company must be aware of this law.
When an entity is required to file, a person called the “Company Applicant” will be in charge of the filing. This person will be the person who actually files the document, as well as the person who directs the filing of another person. This will usually be the “beneficial owner” of the company, but could also include attorneys and paralegals if they file the document on behalf of a client.
In a future article, we will address specifically:
- What reports need to filed and what information must be filed
The general information to be included is a list of each owner, including an address (not a PO Box), a picture ID, and other information. However, the act defines owner very broadly. The filing will include not only people who have an equity interest in the company (actual owners), but people who are beneficial owners. A beneficial owner includes people who have substantial control over a company, even without an actual equity ownership interest. This includes senior officers, people who have the authority to remove senior officers, people who have authority to make important decisions for an entity (even if that person is not an employee), among others. This last requirement is included so that family members of closely held companies will be included. Other people who may be included could be CFOs, COO, general counsel, or trustees of a trust who hold an interest in a small business.
- Penalties for not filing
These are onerous and include both criminal and civil penalties. Failure to comply could include jail time and penalties of hundreds of thousands of dollars.
- Who can access this personal information once the documents have been filed
- What businesses need to do now
This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact Jeffrey Blankstein who counsels clients on estate and retirement planning, individual taxation, real estate and litigation. Mr. Blankstein is admitted to practice law in New York. Attorney Advertising.