The Corporate Transparency Act (CTA), a new law passed in 2021, requires Corporations, LLCs, and other business entities to provide information about their owners to Treasury’s FinCEN.
Are you planning to form a corporation, LLC, limited partnership, limited liability partnership, limited liability limited partnership, or business trust?
Or do you own or advise one of these entities?
For that reason, you should be alert. There’s a new federal filing requirement coming.
What is the Corporate Transparency Act?
Congress passed the Corporate Transparency Act (CTA) in 2021, which requires businesses to provide information about their owners to a unit separate from the IRS, the Department of Treasury’s Financial Crimes Enforcement Network.
The CTA is a government program to crackdown on illicit activity, specifically the use of anonymous shell companies.
The CTA focuses on smaller business entities.
Businesses must file a report with FinCEN that includes each beneficial owner’s name, date of birth, address, and ID number.
FinCEN will include the information in a database for use by law enforcement, national security, and other agencies that enforce anti-money-laundering laws, which will not be publicly accessible.
Violations of the CTA can result in a $500-a-day penalty (up to $10,000) and up to two years’ imprisonment.
The CTA did not take effect immediately, but Congress gave the FinCEN time to write regulations governing how it should be applied. The FinCEN has issued its proposed regulations, which take a reasonably complex line on how the law will be applied.
Here are 4 things you need to know about the new regulations
1- The filing requirement may begin soon: The proposed regulations for the CTA will go into effect sometime between mid-and late 2022,
- New corporations, LLCs, and other entities to file a document within 14 days of being formed, and
- Existing entities will have 1 year to comply.
2- Millions of small businesses are affected: The reporting requirements will apply to almost every small business, excluding sole proprietorships, general partnerships, and most limited partnerships.
Larger companies with over 20 full-time employees and $5 million in gross receipts are exempt.
3. There will be many beneficial owners: A company can have multiple beneficial owners, and identifying them may not always be easy. There are 2 broad categories of beneficial owners:
- Any individual who owns 25% or more of the company, and
- Any individual who, directly or indirectly, exercises substantial control over the company.
4. Law and accounting firms are not exempt: Neither the proposed regulations nor the CTA contains any legal or accounting firm exemption, except for the few public accounting firms registered under the Sarbanes-Oxley Act of 2002. Any law or accounting firm that is a corporation or an LLC will have to file a beneficial owner-report unless it has more than 20 employees and $5M in annual income.