New disclosure requirements? Shedding light on a little-known law
June 13, 2023
Millions of corporations, limited liability companies, and other entities are formed within the United States each year. While such entities play an essential and legitimate role in the U.S. and global economies, they can also be used to facilitate illicit activities. Most business owners are unaware that they are now required to report their beneficial ownership under the Corporate Transparency Act (CTA). Embedded within the National Defense Authorization Act for Fiscal Year 2021, the CTA is a bold step by the United States government in the pursuit of fighting financial crimes and paving the way for a more accountable and transparent corporate landscape in the United States.
We want our clients to know in advance what is required of them to avoid potential late filing penalties. Starting next year, all existing companies – regardless of size – must file within the year. If you start a new company, you have 30 days to file. Failure to do so can result in civil or criminal penalties.
The CTA requires reporting companies – including corporations, LLCs, and similar entities – to disclose vital information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Beginning January 1, 2024, (barring an applicable exception), disclosure is required for any individual who directly or indirectly exercises “substantial control” over the reporting company, or who directly or indirectly owns or controls 25% or more of the “ownership interests” of the reporting company. Any reporting company in existence before that date will have until Jan. 1, 2025, to submit its initial report.
Do you have to register?
The first question a company must consider is whether it has to register at all. The CTA and its implementing regulations will require many U.S. companies to register with FinCEN and provide detailed information about their beneficial ownership, but there are a number of exceptions. Reporting companies are essentially U.S. companies created in the U.S. (or foreign entities registered to do business in the U.S.) by filing a document with the secretary of state.
If a company is a reporting company, it will then need to determine whether it is exempt from reporting. The CTA includes 23 categories of entities that do not have to report, largely because those entities are already regulated by different means. For example, banks, money services businesses, insurance companies and broker-dealers are all exempt from reporting. In addition, public companies and “large operating companies” are exempt.
Additional guidance from FinCEN is needed with the annual filing requirements. As reporting companies adapt to compliance requirements, they must ensure they have an accurate interpretation of the legislation. Having the right advisor is crucial to minimize errors and facilitate successful adherence to CTA obligations.
If you are not sure if your company is required to register, or if you need guidance regarding the reporting process, our advisors are here to help.