The Corporate Transparency Act (the “CTA”), intended to enhance the visibility of beneficial ownership information within corporate entities, went into effect on January 1, 2024. The CTA contains stringent reporting requirements and penalties for false and delayed reporting.
Who Must Report (Exemptions) and What Must be Reported?
The CTA requires certain entities (“Reporting Entities”) to report information regarding their ownership to the United States Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). Reporting Entities formed before January 1, 2024 must report information regarding their ownership by January 1, 2025. Reporting Entities formed on or after January 1, 2024, must report to FinCEN within 90 days of their formation.
Any entity that does not fit into one of the many exemptions is considered a Reporting Entity and is subject to the CTA’s requirements. Many exemptions, which may make an entity a non-Reporting Entity, or which may disqualify a Reporting Entity from the reporting requirements exist. The most common exemption is for “Large Operating Companies”. An entity is a Large Operating Company if it (1) employs more than 20 full-time employees in the United States; (2) maintains a physical location in the United States; and (3) has filed a federal income tax or information return with the Internal Revenue Service for the previous year reflecting more than $5 million in revenues. Many other exemptions exist.
If an entity qualifies as a Reporting Entity, it must report its Beneficial Owners to FinCEN. A Beneficial Owner is an individual who either (1) owns 25% of a Reporting Entity or (2) exerts “substantial control” over a Reporting Entity. While a determination of who owns 25% or more of a Reporting Entity is clear cut, who exerts “substantial control” over a Reporting Entity requires a fact-sensitive analysis and a review of the entity’s governing documents.
Penalties
Failure to comply with the CTA may result in significant penalties. Reporting Entities that intentionally provide false or misleading information may face criminal penalties, including fines of up to $10,000 and imprisonment for up to 2 years. Moreover, civil penalties of up to $500 per day can be imposed for failing to report.
How Frier Levitt Can Help
All domestic existing entities and any party seeking to form a domestic entity, in conjunction with their accounting professionals, should ensure they are complying with the CTA. Frier Levitt can assist entities determine whether or not they fit into one or more exemptions, and if the entity is required to report, who constitutes a Beneficial Owner. Contact us for assistance.
