The Corporate Transparency Act is Taking Effect: Part 2
by Jeffrey Blankstein
On January 1, 2024 (in approximately five months), the Corporate Transparency Act (CTA)  takes effect. In my previous article , I reviewed why the Act was passed, which entities were affected by the Act, who must file, who is exempt from filing, and when the filings needed to be made. In this post, I will review what reports need to be filed, the penalties for not filing, and what businesses should do now to prepare for the future.
To summarize my previous article, the CTA is designed to enable the government to monitor companies for possible money laundering, corruption, tax fraud, and other illicit activities. The way in which this act will be increasing transparency is by requiring domestic companies to file documents related to their owners and employees. Most companies, including LLCs, LLPs, family partnerships, limited partnerships, business trusts and single person LLCs will be required to file certain documents with the Department of the Treasury. Additionally, there are 23 exceptions denoting which entities are exempt from filing which are further explored in the previous article.
Beginning January 1, 2024, all newly formed entities covered by the Act must file a new form. This form must be filed within 30 days of incorporation. It will contain the names of “beneficial owners” and people with “substantial control” over a business entity, including information about each person. For all covered entities that are already in existence on January 1, 2024, the same form must be filed beginning January 1, 2025. Should any information on the form change (such as one of the listed individuals moving, or a new hire), an updated form must be filed. This could be difficult and must be tracked. For example, should a corporate manager move (and many times the owners may not know), the change of address must be filed within 30 days.
There is a great deal of information that must be included on the form. The form must list each beneficial owner. This is broader than one might think. A beneficial owner covers more than a person with an obvious ownership interest. It includes anyone who has an interest in the profits of the company, warrants, options, puts, calls and other interests. Ownership also includes indirect ownership, such as ownership through a trust agreement. In addition, even non-owners must be listed. People who need to be listed include those who exercise substantial control. These people include (1) non-owners who serve as officers of a company; (2) people who have authority to appoint or remove officers; and (3) people who direct or have substantial influence over decisions made by the company. These types of people could include the chief financial officer, general counsel, and trustees of trusts. The goal of the CTA is to include all people controlling an entity. There are several exceptions to the definition of beneficial owner. Some examples of these exceptions include those whose interest begins in the future (such as through inheritance), or a nominee or agent for a beneficial owner.
The information needed to be listed for each person includes the person’s full name, date of birth, home address (not a PO Box), and a PDF of a passport or drivers license. This is much more information than would, for instance, be listed on a tax return. As these forms are extensive, it is important to thoroughly understand them by the time the CTA takes effect in 2024.
The person who files the form for the company is called the Company Applicant. This is the person responsible for making the filing and is usually a beneficial owner. However, the applicant could also be an attorney or paralegal if such a person is retained to prepare the forms.
If the form is not filed, there are both criminal penalties and civil penalties. If the failure to report on time is willful, there exists the possibility of prosecution of a felony, with fines and imprisonment. These penalties are used to incentivize reporting. If the filing is late, the penalties start at $500 per day, up to $10,000 per violation. The criminal penalties can include fines up to $250,000 and imprisonment of not more than five years. If the refusal to file is done in conjunction with violating other laws, the maximum penalty increases to $500,000 and 10 years in prison. Penalties can also include the loss of business assets. This would be accomplished by the government seizing the corporate assets. The failure to comply also has the potential to lead to the loss of reputation. This could result in difficulty in obtaining financing and contracting with other businesses.
In order to prepare for these new requirements, companies should begin now. They can begin gathering the names of people who will be listed in the filing, as well as the appropriate information needed for each person. Since the people preparing the forms may be a CPA or attorney, if you send the information at the last minute, it is likely that other companies will be doing the same, and the filings may not be made on time. It is doubtful that the preparers will have all of the information necessary, so companies should start gathering information, and maintaining updated records in order to be in compliance. Companies may want to implement a system to keep track of the reported information, so that the company can know when to update the filing. Updates would be necessary for new hires, people listed in the filing who move or change information, people who are promoted to management positions, or transfers of ownership due to an owner’s death.
More information about the new law will be addressed in the third part of this series. We will address where to file the forms, what agency will keep the records, who can see the filings (since the information will have a great deal of personal information), who will enforce the law, and the duties of attorneys under the law.
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.