The Corporate Transparency Act (CTA), a new law passed in 2021 that
requires corporations, LLCs, and other business entities to provide information about their owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).  FinCEN has now issued proposed regulations on how it intends to implement the CTA.  The new proposed regulations hold several unpleasant surprises for businesses and the lawyers and accounting firms that advise them.

What Is The CTA About

The CTA is part of a major government effort to crack down on corruption, money laundering, terrorist financing, tax fraud, and other illicit activity. The CTA targets the use of anonymous shell companies that facilitate the flow and
sheltering of illicit money in the United States.  Currently, few states require corporations, LLCs, or other entities to disclose information about their beneficial owners—that is, the human beings who actually own or control them—or the people who form them. And there has never been a federal requirement to do so. As a result, anonymous shell comThe CTA Is Not Just for Corporations and LLCs

panies abound, and it can be impossible for law enforcement to discover who really owns them.  This will soon change. The CTA empowers FinCEN to establish a massive database containing beneficial owner information for most types of smaller business entities. These include U.S.-based businesses and foreign entities
that register to do business in the U.S. The database will not be publicly accessible; it is solely for the use of law enforcement, national security and intelligence agencies, and federal regulators enforcing anti-money laundering
laws.  The CTA focuses on smaller business entities, since they are most likely to be shell companies. The law contains 23 exemptions for most types of larger businesses. These include publicly traded corporations and other businesses that are heavily regulated by the federal government.  Also exempt is any business that has more than 20 full-time employees, has a physical presence at a business office in the United States, and has filed a federal tax or information return the prior year showing more than $5 million in gross receipts or sales.  Violations of the CTA can result in a $500-a-day penalty (up to $10,000) and up to two years’ imprisonment.

Surprise #1: The CTA Is Not Just for Corporations and LLCs

Surprise #2: The CTA May Take Effect Sooner than Anticipated

Surprise #3: Beneficial Owners Are Broadly Defined

Surprise #4: Tight Deadline for Updated Beneficial Owner Reports

Surprise #5: The Report Must Identify Those Who Help Form Corporations and LLCs

FinCEN has issued proposed regulations showing how it intends to implement the CTA—a law enacted in 2021 requiring smaller businesses to disclose the names, addresses, and other identifying information of their beneficial owners for inclusion in a FinCEN database that will be accessible only to law enforcement.
The CTA will take effect when the proposed regulations become final, which may be as early as mid 2022.
After the CTA takes effect, all new smaller businesses will have to file a beneficial owner report with FinCEN within 14 days of formation. All existing smaller businesses will have to file a report within one year.
Beneficial owners will include individuals who own 25 percent of a business entity, and all those who exercise substantial control over it.
Beneficial owner reports will have to be updated within 30 days if there is a change in the reported information, including a change in an owner’s address.

 

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