The Corporate Transparency Act Means Rigorous Reporting Requirements for Corporate Clients

The Corporate Transparency Act (CTA) is a new law that imposes additional reporting requirements on qualifying entities. Despite its name, the CTA will affect more than just corporations – it will also have an impact on limited liability companies and similar entities,[1] such as business trusts and limited liability partnerships.

The CTA Is Designed to Impact a Wide Range of Entities

The CTA will require certain entities, characterized as “Reporting Companies” to report information regarding applicants and beneficial owners to the Financial Crimes Enforcement Network (FinCEN).[2] The CTA is intended to govern as many entities as possible. The definition of “Reporting Company”, for example, includes all domestic entities and foreign entities that are registered to do business in the United States, with certain specific carveouts.[3]

The sweeping nature of the CTA is by design; FinCEN hopes that this new measure will “help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity.”[4] However, the benefits provided by this Act are accompanied by onerous obligations on our clients’ entities. Failure to comply with the reporting requirements may result in civil penalties of $500 per day, a fine of up to $10,000, and imprisonment for up to 2 years.[5]

Qualifying Entities Will Need to Report Applicants and Beneficial Owners

Entities that are not exempt from the definition of Reporting Companies will need to report information regarding their Applicants and Beneficial Owners, including names, dates of birth, addresses, and identification numbers.[6]

Applicants: Applicants are any individuals who filed a formation application.[7] In California, Applicants would be those individuals who file Articles of Incorporation for corporations or Articles of Organization for LLCs.

Beneficial Owners: The definition of a Beneficial Owner is more nuanced. The term includes individuals who exercise substantial control over the entity or own at least 25% of the entity.[8] An individual exercises substantial control over an entity if the individual serves as a senior officer of the entity, has authority over the appointment or removal of a senior officer, has substantial influence over important decisions made by the entity, or has any other form of substantial control.[9] Minors, nominees, employees, creditors, and those with only a right of inheritance are excluded from the definition of a Beneficial Owner.[10]

The CTA Requires Ongoing Reporting to Account for Changing Information

For entities that are formed after January 1, 2024, initial reporting must be done within 30 days of the date of formation.[11] For entities formed before January 1, 2024, (or foreign entities registered before that date) the required information must be submitted to FinCEN by January 1, 2025.[12]

In addition to these initial reporting requirements, Reporting Companies will be required to submit updates within 1 year of a change in any reported information,[13] such as the addition or replacement of the entity’s Beneficial Owners, or a change in address of a previously reported Beneficial Owner. When an entity that qualified for an exemption subsequently ceases to qualify, that entity must file a report within 30 days of the date the entity no longer qualifies for the applicable exemption.[14]

Attorneys Can Help Prepare Corporate Clients for the CTA Requirements

The burden of reporting falls on the entity itself; however, companies must have current information for Applicants and Beneficial Owners in order to ensure full compliance with the CTA. Attorneys can help their corporate clients navigate the responsibilities imposed by the CTA by ensuring that members or shareholders promptly inform their entities of changes in relevant information. Companies may wish to consider contractually imposing these informational obligations on their members or shareholders.

Because the information reported under the CTA will be submitted to FinCEN rather than the California Secretary of State, it is unclear how existing California entities will gain notice of the CTA requirements outside of the advice of counsel. Accordingly, California attorneys should prepare corporate clients for compliance with the CTA by explaining its impact on qualifying entities.

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[1] 31 U.S.C. § 5336(a)(11)(A).

[2] 31 U.S.C. § 5336(a).

[3] 31 U.S.C. § 5336(a)(11).

[4] Federal Register, The Daily Journal of the United States Government: Beneficial Ownership Information Reporting Requirements. September 30, 2022. Available at: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements.

[5] 31 U.S.C. § 5336(h)(3)(A).

[6] 31 U.S.C. § 5336(b)(2)(A).

[7] 31 U.S.C. § 5336(a)(2).

[8] 31 U.S.C. § 5336(a)(3)(A).

[9] 31 C.F.R. § 1010.380(d)(1)(i).

[10] 31 U.S.C. § 5336(a)(3)(B).

[11] 31 C.F.R. § 1010.380(a)(1)(i).

[12] 31 C.F.R. § 1010.380(a)(1)(iii).

[13] 31 U.S.C. § 5336(b)(1)(D).

[14] 31 C.F.R. § 1010.380(a)(1)(iv).