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Wendy Z. Cox, J.D., CTFA Director of Personal Trust, Chief Fiduciary Officer

March 1, 2024

The Corporate Transparency Act

The Corporate Transparency Act (CTA) went into effect on January 1, 2024.  The CTA broadens the reporting to the Financial Crimes Enforcement Network (FinCEN) of information, including personal information, concerning the control and beneficial ownership of nearly all small U.S. companies.  The Act is designed to combat money laundering and other financial crimes.

The CTA is simple in concept, but more complicated in its application.  The following items are key to navigating the new reporting requirements:

  • Whether an entity is a “Reporting Company” that must file a report?
  • Who are the “Beneficial Owners” and “Company Applicants” whose information must be reported?
  • When the report is due?

Definitions:

  • Reporting Company. Unless an entity is specifically exempted, a reporting entity is any domestic entity that was “created by the filing a document with a secretary of state or any similar office under the law of a State or Indian tribe.” This includes corporations, partnerships, business trusts, limited liability companies (LLCs), and partnerships.
  • Exempt Entities. The CTA exempts 23 types of entities from reporting. Examples include: banks, regulated financial institutions, insurance companies, CPA firms, pooled investment vehicles, tax-exempt entities, business entities with more than 20 employees, and business entities with annual gross receipts of greater than $5.0 million.
  • Beneficial Owner. Any individuals who either (i) exercise substantial control over a reporting company; or who (ii) own or control at least 25% of the ownership interests of a reporting company.
  • Substantial Control: Substantial control individuals who are required to be reported under the CTA include: (i) senior officers, like president, CFO, general counsel, CEO, or any other officer, regardless of title, who performs a similar function; and (ii) any person who “directs, determines or has substantial influence over important decisions made by the reporting company or has any other form of substantial control over the reporting company.”
  • Company Applicant: A company applicant includes the individual who directly files the document that creates the reporting entity, and the individual who is primarily responsible for directing or controlling that filing. A Company Applicant would include lawyers, paralegals and other service providers who file the document with the state.

Every entity will need to determine whether it a Reporting Company or whether it falls under an exception.  If it is a Reporting Company, the entity will need to identify its Beneficial Owners and Company Applicants, and obtain the name, birth date, address, and an identifying number such as driver’s license or passport along with a copy of the document for each individual.

Trusts create some additional complications.  A trust, standing alone, is not a Reporting Company. However, if the trust holds an interest in a Reporting Company, such as an LLC that owns real estate for liability protection purposes, or an LLC wrapper used for valuation discounts, reporting will be required.  The individuals who will be required to be reported as beneficial owners will generally include: trustees; others who possess authority to dispose of trust assets, e.g. a trust director; any beneficiary who is the sole permissible recipient of income or principal from the trust, or who possesses the right to demand a distribution of, or withdraw substantially all of the trust assets; and, any settlor who possesses the right to revoke the trust or otherwise withdraw the assets of the trust.

Deadlines for CTA Compliance

Reporting Companies created before January 1, 2024 must file their initial report by January 1, 2025 and are not required to identify their Company Applicants.

Reporting Companies created between January 1, 2024 and December 31, 2024 must file their initial report with 90 days after receiving actual or public notice, whichever is earlier, of their company’s creation or registration.

Reporting Companies created after January 1, 2025 must file within 30 days.

A Reporting Company must file an updated report whenever there is a change in its basic information, a change in Beneficiary Owners, or the status as a Reporting Company changes.  The updated report must be filed within 30 days of the change.

Penalties for Non-Compliance

Civil penalties are $500 a day up to a maximum of $10,000.  Criminal penalties can also be charged with up to two years imprisonment. However, it appears that in order to trigger such penalties there must be the willful failure to file, or the provision of false or fraudulent information, or the willful failure to provide complete or updated beneficial information to FinCEN.

There are additional unanswered questions, such as who needs to file on behalf of a corporate trustee because an individual is required to be identified.  Greenleaf is keeping a close eye on developments.

If you have created Reporting Entities, you should be in contact with your advisory team to determine who will be filing the FinCEN report and identifying the Beneficial Owners.  Greenleaf will be working closely with our clients and their advisors to make certain that appropriate reporting is completed.