Compliance with the Corporate Transparency Act (CTA)

On September 30, 2022, the Treasury Department issued final rules to implement the Corporate Transparency Act (“CTA”) which became law in 2021. The CTA will impact a majority of the small and medium sized business entities, including some trusts. Bottom line, current businesses will need to file their first report identifying owners and applicants (an “Initial Report”) before January 1, 2025, and any business created after January 1, 2024, will need to file its Initial Report within 30 days of formation. After an Initial Report is filed, a Reporting Company must file an updated report within 30 days of a change in prior reported information. You can read the final rule here: https://www.govinfo.gov/content/pkg/FR-2022-09-30/pdf/2022-21020.pdf

What is the purpose of the CTA?

The CTA is part of the National Defense Authorization Act, enacted on January 1, 2021. The rules are “intended to prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.” The goal is to help the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) better understand how the owners of entities may be connected, and to trace the flow of money to reduce “a key illicit finance risk for the U.S. financial system.” To do this, the CTA provides FinCEN with information on the identities of the individuals who own or control entities doing business within the United States. The CTA specifically intends to reach entities not otherwise regulated by previous rules or rulemaking agencies such as the Customer Due Diligence Rule (CDD Rule) and the Securities and Exchange Commission (SEC). As a result, the CTA will impact a majority of the small business entities, including some trusts. 

Who is a Reporting Company and what must be reported?

Any entity created by filing with a secretary of state (or similar state or tribal office), unless the entity is specifically excluded under one of the 23 exceptions. The term “Reporting Company” is broadly defined to include corporations, limited liability companies, partnerships, business trusts, and other similar entities. The law regulating reporting is complex and fact specific. One major exemption is for “Large Operating Companies”. A Large operating company is a company with a physical office within the US, which meets both of the following requirements: (i) it has “more than 20 full time employees in the United States” and (ii) its federal tax return for the prior year filed with the IRS demonstrates more than $5,000,000 in gross receipts. 

Reporting Companies must report information on (1) the company, (2) its “Beneficial Owners”, and (3) its company “Applicant.” Beneficial Owners include any individual who owns 25% or more of the Reporting Company, or any individual who has influence, directly or indirectly, over important matters. A Company Applicant is any individual who filed the organizing documents which formed a Reporting Company or anyone who directs or controls the filing of the organizing documents by another person.

Penalties 

A Reporting Company who fails to timely file may be assessed a $500 penalty for each day the report was delayed. The law also provides criminal penalties of a $10,000 fine or up to two years in prison when a Reporting Company willfully fails to report complete or updated information, or willfully provides false or fraudulent information (including false identifying documents). 

Preparing for Reporting:

All Reporting Companies formed before January 1, 2024, will need to submit an Initial Report in early 2024. Any Reporting Company formed after January 1, 2024 will need to submit an Initial Report within 30 days of formation. If your business is a Reporting Company start gathering the required information as soon as possible. After your Initial Report is submitted, changes to reported information must be updated within 30 days of the change.

The law and rules regulating Initial Reports and Reporting Companies are complex and fact specific. If you would like assistance determining whether your company has a reporting requirement, or would like assistance in preparing reports, now is the time to contact an attorney. Work with an attorney to create an internal plan for routine monitoring of reported information and to update the report quickly if any reported information changes. Going forward, consult an attorney when creating new entities to assess if the CTA applies to your entity and, if so, to ensure the Initial Report is accurately and timely submitted

In view of the length of the timeframe for compliance we, anticipate that the Treasury Department may, in the interim, issue further guidance, including on some definitions and possibly forms for compliance. 

Please contact a Business Transaction and Counseling attorney if you have any questions.

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Simmons Perrine Moyer Bergman PLC is a full service law firm with locations in Cedar Rapids and Coralville, Iowa. For more information, visit spmblaw.com.  

Disclaimer: This information is intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired.