In 2021, Congress passed “The Corporate Transparency Act of 2020,” which goes into effect January 1, 2024 and has the ability to impact millions of individuals throughout the country. Anyone owning even a minority interest in a new or existing small business that operates in the United States needs to familiarize themselves with this Act and how it may impact them and their business interests. Below is a short summary of the most salient terms of the new Act:
What is The Corporate Transparency Act of 2020?
The Act is touted as an “anti-money laundering law” which requires that most businesses operating in the United States disclose information related to their underlying ownership to a database to be established and maintained by the Financial Crimes Enforcement Network within the Department of Treasury (“FinCen”). This database will be available to law enforcement agencies throughout the United States with the goal of preventing businesses from using shell companies to commit illegal acts such as tax evasion, money laundering, and terrorism.
Who must report under the Act?
- Foreign and Domestic Companies
Domestic companies required to report include corporations, limited liability companies, or any other entity that is created within the United States by filing a document with a secretary of state or similar office under the laws of a state or Indian tribe.
Foreign companies required to report include corporations, limited liability companies, or any other entity that is formed under the law of a foreign country and is registered to do business in the United States.
- Exemptions
Companies except from these reporting requirements include, but are not limited to: publicly traded companies, banks, brokers or dealers in securities, investment company or investment advisor, venture capital fund advisor, pooled investment vehicles, tax-exempt entities, subsidiaries that are wholly owned, directly or indirectly, by certain exempt entities, certain inactive entities, and certain companies that have 20 or more full-time U.S. employees and filed a federal income tax return for the prior year reporting more than $5,000,000 in gross receipts or sales.
What information must be reported?
- Company Information
- Full legal name, including all trade and dba names
- Street address for principal place of business
- Jurisdiction of formation and registration and tax identification number (TIN) (or foreign TIN and corresponding jurisdiction number for foreign companies)
- Ownership Information
A list of all “beneficial owners” and “applicants” of the reporting company. A beneficial owner is defined as any individual who either exercises substantial control over the company or directly or indirectly owns or controls at least twenty-five percent (25%) of the entity. An applicant is the individual who directly files the documents creating the company.
Note, each reporting company must report the actual individual underlying owners of the entity, and it is important to read the rules to determine who must report. For example, if a reporting company is owned by another company, the reporting company must look through the parent company to the individual that owns the parent company and report that individual as the beneficial owner of the reporting company.
Furthermore, owning the business interest as settlor, a beneficiary, or even as a trustee of a trust may cause one to be a beneficial owner under the Act.
Information required for beneficial owners and applicants includes:
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- Name
- Date of Birth
- Address
- Passport or Driver’s License Number
- Picture ID
What is the timeline to comply with the Act?
- Filing the Report
- Existing entities (formed prior to January 1, 2024) must file the initial report prior to January 1, 2025.
- New entities (formed after January 1, 2024) must file the initial report within thirty (30) days of formation.
- Changes and Corrections to amend the report must be filed within thirty (30) days from the occurrence of the change/correction to update the reported information.
Consequences for failing to comply or inaccurate reporting?
- Violators may be subject to fines from $500 up to $10,000 a day.
- Violators may be subject to imprisonment for up to two (2) years.
- Additional criminal penalties and imprisonment may apply in certain circumstances.
The overall effect of the Act is to allow the federal government to pierce blind business entities to identify the underlying ownership of such entities. As the above information makes clear, the reach of this Act is extensive and the penalties for failure to report are onerous. There are many nuances to the reporting requirements for this Act, and as a result, all individuals with business dealings are strongly encouraged to work directly with their accountants to determine whether they (and their business(es)) will be subject to these reporting requirements.