The Corporate Transparency Act (the “CTA”) is finally here.
How does it affect your entity? Does it only affect domestic or foreign entities? What is required to be reported? What are the deadlines and penalties for non-reporting? Read on to find out more.
Background
First, how did we get here? The CTA was conceived and passed after years of congressional stalling and inaction on the issue of entity transparency (or rather lack thereof). While the US government has longed criticized financial tax havens such as Switzerland for their lack of transparency, the international community labelled the US a hypocrite for the lack of transparency of entities formed and operating in its own jurisdiction.
The crux of the issue is that virtually all US entities are formed at the state level and to date not one single state maintains any type of record of beneficial ownership of such entities. The most infamous jurisdiction is Delaware, that only requires a minimal reporting of an entity’s officers.
This of course has led to the abuse of such entities, both in the US and abroad, as money launderers, tax evaders and other unscrupulous actors have utilized US LLC’s to mask their true identity. The Obama administration attempted to partially fix this issue back in 2016 by implementing administrative rules requiring the reporting of beneficial ownership of LLC’s whose single member was a foreign person, but such rules had severe limitations, as it was required to utilize existing reporting forms (Form 5472) typically used for completely different reporting purposes, akin to forcing a round peg into a square hole.
Congress finally acted and passed the CTA on January 1, 2021 under the National Defense Authorization Act of 2021. While the law has been in effect for almost two years, FinCEN only just recently issued final reporting rules on September 29, 2022.
Which Entities are Subject to Reporting under the CTA?
The title of the CTA itself is somewhat of a misnomer and encompasses far more than just corporations. It requires any entity established with a filing under the laws of a state or territory of the United States to report. This would encompass not only corporations, but also limited liability companies (LLC’s), Limited Partnerships (“LP’s”), LLP’s, etc.
Foreign entities (ie. Those formed outside of the United States) are also subject to reporting if such foreign entity is engaged in a trade or business in the United States. Thus, for instance, a foreign entity that owns and rents out US real estate will be required to report.
When Does Reporting Begin?
Any reporting company existing prior to January 1, 2024 must filed its initial report no later than January 1, 2025. Any reporting company formed after January 1, 2024 must file its initial report within 30 calendar days after its creation.
Who is Considered a Beneficial Owner?
Under the rules, beneficial owners are defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” This definition includes those persons serving as officers of the reporting company, and any individual who has direct or indirect substantial control over the company.
What Information will be required to be Reported as to Individuals?
The information needed to be reported with regard to individuals shall be their full legal name, date of birth, current address, and a number associated with either a passport or other government issued identification.
For any entity created after January 1, 2024, the information as to the organizer or incorporator of the entity will also have to be reported, even if such person is not an ultimate beneficial owner. This may include third party professionals such as lawyers and accountants, who typically assist clients with the formation of entities.
Will a Company need an “Employer Identification Number” (“EIN”) to Report?
Yes. All reporting companies will need to obtain an EIN number in order to properly report. If you have an existing company that does not yet have an EIN, we advise to apply for an EIN sooner than later, as IRS backlogs can significantly delay the issuance of such numbers.
Are Trusts Required to Report?
Generally speaking, trusts in of themselves will not be required to report as a trust is a private document that is not required to be registered with any local or state government in order to become effective. However, the beneficial ownership information of a trust would have to be reported if the trust is a beneficial owner of 25% or more of a reportable entity.
How else May this Affect my Estate Plan?
Many estate plans, especially those that look to reduce the impact of estate taxes, may utilize one or more entities in such planning, such as family limited partnerships, LLC’s, closely held business interests and corporations or LLC’s organized as Private Family Trust entities. All of these types of entities will generally be subject to the reporting requirements.
Will the Reported Information be Publicly Available?
No. The information reported will not be disclosed or available to the public.
What if there is a Change in Ownership following the Filing of a Report?
The Company will have 30 days to file a report on such change, and to report the new owners.
What Are the Penalties for Non-Compliance?
The penalties for non-compliance are substantial, and for willful failure can result in a civil penalty of up to $500 per day for each day or non-compliance plus a fine of up to $10,000.00.
To learn more about the Corporate Transparency Act, contact Chris Curtis at cdc@cpllawfirm.com.