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A row of buildings in New York City.The Corporate Transparency Act (“CTA”) was enacted January 1, 2021, as part of the National Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act and related anti–money laundering rules since the U.S. Patriot Act. The CTA is intended to address and guard against money laundering, terrorism financing, and other forms of illegal financing by mandating certain entities (primarily small and medium size businesses) to report “beneficial owner” information to the Financial Crimes Enforcement Network (“FinCEN”). The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect, and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances. This blog should provide you with some general information regarding the new reporting rules as well as initial steps you should take to address the implications of the CTA to your organization.

You may have already received an advisory email from Bowman & Company LLP on this topic earlier in 2024. This blog serves solely to restate this advisory on our website to be publicly accessible; not to provide updated information since January 2024.

What Entities are Subject to the New CTA Reporting Requirements?

Entities required to comply with the CTA (“Reporting Companies”) include corporations, limited liability companies (LLCs), and other types of companies that are created by a filing with a Secretary of State (“SOS”) or equivalent official. The CTA also applies to non-U.S. companies that register to do business in the U.S. through a filing with a SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.

There are a number of exceptions to who is required to file under the CTA. Many of the exceptions are entities already regulated by federal or state governments and as such already disclose their beneficial ownership information to governmental authorities. For more information on exceptions, including who qualifies as a “large operating company”, see the full informational flyer provided in the references of this blog.

Who is Considered a “Beneficial Owner” of a Reporting Company?

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of the company’s ownership interests. An individual exercises “substantial control” if the individual (i) serves as a senior officer of the company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; or (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company.

In addition, individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control. CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense, so many companies may need to seek legal guidance to ultimately determine who are deemed beneficial owners within their organization.

For a more in-depth timeline on the reporting requirements, see the PDF document in the references.

Preparation & Suggested Actions

Bowman & Company LLP recommends that all business owners look at this PDF attachment for a quick organizational “self-evaluation”. Identifying if the most recent CTA requirements apply to your business can help you prepare for the next steps. As the CTA is not a part of the tax code, the assessment and application of many of the requirements set forth in the regulations, including but not limited to the determination of beneficial ownership interest, may necessitate the need for legal guidance and direction. As such, since we are not attorneys, our firm is not able to provide you with any legal determination as to whether an exemption applies to the nature of your entity or whether legal relationships constitute beneficial ownership.

We strongly encourage you to reach out as soon as possible to legal counsel with expertise in this area to assist your organization with the steps you need to take to ensure compliance with the CTA, if applicable. Note that penalties for willfully violating the CTA’s reporting requirements include (1) civil penalties of up to $500 per day that a violation is not remedied, (2) a criminal fine of up to $10,000, and/or (3) imprisonment of up to two years.

Sources & Further Reading

– U.S. Department of Treasury: Financial Crimes Enforcement Network | Beneficial Ownership Information – Link

– Bowman & Company LLP | CTA Informational Flyer – Link [PDF]

 

We invite you to CONTACT US if you would like additional information or to discuss your particular business needs.

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