To help combat financial crimes and the anonymous misuse of private companies for illegal activities, the federal government introduced the Corporate Transparency Act (CTA), which mandates the disclosure of beneficial ownership to prevent criminals from remaining hidden behind the veil of corporate anonymity. The new disclosures will make it easier for law enforcement to trace individual ownership across multiple entities and see ownership and control regardless of jurisdiction of formation.
What Businesses Need to Know
Under the Corporate Transparency Act, a significant majority of U.S. companies are now required to disclose detailed ownership information to the federal government, regardless of state of formation. This ownership information includes names, birthdates, addresses, and a copy of an ID (like a passport), for anyone owning more than 25% of a private company. Additionally, those who have substantial control over its operations such as senior officers or directors. This requirement applies regardless of whether the ownership or control is held through a series of holding companies. The key aim is to ensure that the ultimate owners, those at the top of the ownership chain, and those people who are not owners but still control or influence the decision making of the company, are transparently documented in a newly established, secure cloud-based federal database managed by the Financial Crimes Enforcement Network (FinCEN). Wow, right? Let’s dig in further!
Will the filings be publicly available?
Thankfully, no. CTA filings are confidential and access is limited to certain government agencies and law enforcement bodies. This is to protect the highly sensitive and confidential nature of the information, which includes personal details that could potentially be misused for identity theft and other risks if made public. The Financial Crimes Enforcement Network (FinCEN), a federal agency, is responsible for creating and managing this secure database.
Does this apply to all companies?
While the Corporate Transparency Act casts a wide net, it does include specific exemptions. Every corporation, limited liability company (LLC), and similar entity is subject to the Act unless an exemption applies. This is especially relevant to smaller companies, which are more often used by criminals as “fronts” or “shells” to conceal financial crimes. Public companies are exempt, due to their existing regulatory disclosure requirements. Similarly, private companies with significant operational footprints — evidenced by a physical office, over $5 million in revenue reported on their tax return, and more than twenty full-time employees — are also exempt. In total, there are 23 exemptions, but for most companies, compliance with the Act’s disclosure obligations will be mandatory. Notably, startup companies and small businesses are not exempt as there is no exemption based on being too small or early stage. If this sounds like a big deal, that’s because it is! Given the broad scope of this legislation, it’s likely that this applies to your business, making understanding and adhering to its requirements a new compliance burden for you to understand.
When is the filing required for existing companies?
The Corporate Transparency Act has specific deadlines for compliance that businesses need to be aware of to avoid penalties. The law kicks in and the database goes live January 1, 2024. If your company was created before this date, you will have a grace period of one-year (until January 1, 2025), to file your initial Beneficial Ownership Information report.
This filing will become a regular and recurring requirement for most companies. Updates will be due within 30 days every time there is a change in information, such as changes in senior management, name or address change, and material changes to the ownership stack such as from an investor financing, a partner buyout, a sale of the company, or other change to the significant owners or persons who manage or control the company.
Penalties for Non-Compliance
Failure to comply with the CTA can lead to fines of up to $500 per day, accumulating to a maximum of $10,000. Moreover, willful non-compliance can lead to possible imprisonment for up to two years. Misuse of information collected under the CTA can increase the maximum fine up to $250,000 and up to five years in prison. In cases involving other law violations or a pattern of illegal activity exceeding $100,000 within a 12-month period, the penalties escalate to fines up to $500,000 and imprisonment for up to 10 years. These penalties highlight the importance of complying with both the reporting and confidentiality requirements of the CTA.
Don't delay — Contact Adams Corporate Law to ensure your business is prepared
Will investors limit or reduce their ownership to 24.99% to avoid disclosure? Given the complexity of CTA requirements and the risks of non-compliance, it's wise to plan ahead. Reach out to Adams Corporate Law today at (714) 619-9360 to schedule your consultation. We specialize in personalized strategies to ensure your business navigates these changes seamlessly. Our team can make the filings for your business. Let us guide you through your specific obligations, ensuring timely compliance, and advising on any exemptions and beneficial ownership determinations that apply to your business.