Many businesses must comply with the Corporate Transparency Act (CTA), but there are also numerous exceptions to the disclosure rules. Given the fine print and loopholes, a business owner or manager could easily make a mistake by deciding whether the CTA does or doesn’t apply.
What is the CTA?
In the Fiscal Year 2021 National Defense Authorization Act (NDAA) were many reforms to the federal government’s anti-money laundering rules. Money laundering involves taking profits from illegal activities and handling or investing them to make them appear to result from legitimate business activities.
The NDAA includes the Anti-Money Laundering Act of 2020 (AML Act), and the CTA is part of the AML Act. The AML Act’s goals are to modernize, strengthen, and streamline the anti-money laundering efforts by promoting industry engagement, innovation, and regulatory reform, through forums like the Financial Crimes Enforcement Network (FinCEN) Exchange (part of the US Treasury Department).
The CTA:
- Establishes applicant and beneficial ownership reporting mandates for limited liability companies, corporations, and other entities formed or registered to do business in the US
- Authorizes FinCEN to gather this information and share it with financial institutions and government authorities, subject to limitations, controls, and safeguards
The CTA will go into effect when its regulations are finalized, expected in late 2022 or early 2023. Proposed regulations were published in December 2021, interested parties submitted comments, and the agency may make changes before they’re made final.
What are Required CTA Disclosures?
The CTA requires companies to report to FinCEN information on “beneficial owners.” The CTA states a “beneficial owner” is:
- Any individual
- Who, directly or indirectly
- Through any contract, arrangement, understanding, or relationship
- Exercises substantial control over the entity, or
- Owns or controls at least a quarter of the entity’s ownership interests
The final regulations should clarify the meaning of “beneficial owner” by defining “substantial control” and “ownership interests.”
Information must also be provided about an “applicant,” a person who:
- Applies to form a limited liability company, corporation, or other similar entity under state or Indian tribe law, or
- Registers or applies to register a limited liability corporation, or other similar entity formed under foreign laws to do business in the US by filing a document with a Secretary of State or similar office under state or Indian tribe laws
Information about the “beneficial owner” or “applicant” must include their:
- Full legal name
- Birthdate
- Current business or residential street address
- Unique identifying number from an identification document or FinCEN identifier
Which Companies Need to Comply With the CTA?
Draft regulations state there are two types of “reporting companies”:
- Domestic: Any corporation, limited liability company, or other entity created by filing a document with a Secretary of State or a similar office under state or Indian tribe law
- Foreign: Any corporation, limited liability company, or other entity formed by the laws of a foreign country and registered to do business in the US by filing a document with a Secretary of State or equivalent office under a state or Indian tribe law
There are many exceptions to these broad categories. The CTA excludes 23 different types of entities from the definition of a reporting company. They operate in heavily regulated settings and include:
- Banks
- Domestic credit unions
- Securities issuers
- Money transmitting businesses
- Registered investment advisors
- Insurance companies
- Other entities
Another category of exemption is “large operating companies,” which are companies that:
- Have more than 20 full-time US employees
- Filed in the prior year federal US income tax returns showing more than $5 million in gross receipts or sales
- Have an “operating presence” at a physical office (owned or leased by the party but not a residence or shared space) in the US
Other exempted entities include:
- Public utilities
- Entities controlled or owned by one or more other entities that aren’t reporting companies
- Securities issuers
- Domestic governmental authorities
- Banks
- Domestic credit unions
- Depository institution holding companies
- Businesses that transmit money
- Security brokers and dealers
- Securities exchange or clearing agencies
- Other Securities Exchange Act of 1934 entities
- Registered investment companies and advisers
- Venture capital fund advisers
- Insurance companies
- State-licensed insurance producers
- Commodity Exchange Act registered entities
- Financial market utilities
- Pooled investment vehicles
- Tax-exempt entities
- Entities that help tax-exempt entities
- Subsidiaries of certain exempt entities
- Inactive businesses
Your business will need to comply with the CTA if your company falls under the definition of a foreign or domestic reporting company and isn’t exempted by the law.
CTA Filer Can Help You and Your Company
You could spend your time reviewing hundreds of pages of the CTA, its related federal statutes, and CTA’s regulations and keep track of changes and any court decisions impacting them. Or we can do it for you. Let us help you navigate confusing policies and simplify the reporting process. You can instead focus on your business.
We plan to offer easy, online filing with step-by-step instructions. Our prices are far more affordable than what your accountant or attorney would charge. Our annual monitoring will help you stay in compliance so you can avoid financial penalties and up to two years in prison for not filing the required information on time.
If you want to stay on top of the CTA and all of the proposed regulations, make sure to sign up for updates on our homepage today.
