The Corporate Transparency Act (CTA), a product of anti-money laundering efforts at the federal level, has been touted as a pivotal moment in clarity and accountability for businesses, particularly small businesses throughout the country. In part one, we discussed that more than 32 million businesses will now have to report personal information about individuals and entities involved in the formation, structure or management of their business in an effort to reveal financial interests.
The CTA’s reporting requirements will apply to both new and existing companies, such as corporations, limited liability companies (LLCs) and any other entity you can create with a filing to a Secretary of State.
This includes foreign organizations that are authorized to do business in the United States.
There are, however, multiple types of organizations that are exempt from reporting requirements, including trusts, sole proprietorships or general partnerships.
One of the most notable exceptions is for large operating companies.
For these purposes, the definition of a large operating company is 20 full-time employees, operations within the U.S. and at least $5 million in gross sales on their tax return.
Other notable exceptions include 501(c)(3) nonprofits and other tax-exempt organizations, regulated financial services organizations (banks, credit unions, investment companies, accounting firms, etc.), publicly-traded companies that already report to the SEC, entities that are now considered inactive and hold no assets, wholly-owned subsidiaries of exempt entities and more.
If your business isn’t exempt, it’s important to note that the CTA mandates reporting of information about its beneficial owners – which are defined as individuals who either directly or indirectly own or control at least 25% of the ownership interests in your company.
Keep in mind that ownership interest translates to more than just equity and includes any assets that can be converted to equity, including, but not limited to, stock options, membership interests, futures and more.
But who really owns a company when it comes to the CTA?
This question has a more complex answer than you might think.
“Beneficial owners” are not just the official shareholders, but also individuals who hold substantial control over the company.
This includes senior officers, individuals with power over board appointments or removals and those who make influential decisions.
In fact, this definition of beneficial ownership is intentionally broad to capture any other forms of significant control.
People who do not need to report as beneficial owners include minor children (their parents or guardians’ information should be reported), those acting as an agent of another individual or those who act solely as an employee and not a senior officer.
Relevant entities and individuals will need to report basic information – which includes their legal name, trade names/dbas, current address, jurisdiction and federal taxpayer ID number. Individuals who are labeled as beneficial owners will need to report their full legal name, date of birth, residential address and driver’s license or passport number, along with a copy of the form of identification.
Entities formed after Jan. 1, 2024, will also need to report the same information for any person who files to the Secretary of State on behalf of an entity and any person who is responsible for directing the filing such as attorneys, paralegals, accountants, brokers and other third-party agencies.
Because the CTA goes into effect in fewer than six months, now is the time to connect with your business’s legal team to ensure your questions are answered and information is gathered to comply with this new requirement initially, and to establish internal procedures to ensure continued updates are made in accordance with leadership changes at the business as well.
In our next column, we will go into more detail about the timeline of CTA’s reporting requirements and possible results of failure to comply.
To learn more about the Corporate Transparency Act, visit federalregister.gov/d/2022-21020.