In 2021, Congress enacted the Corporate Transparency Act, which went into effect for new businesses on Jan. 1, and will soon apply to millions of businesses across the country, starting Jan. 1, 2025.
Jan. 1, 2025, is the deadline for existing businesses to comply with the CTA, if it’s applicable to them. Companies formed in 2024 have a 90-day filing deadline from the date of formation, but that will drop to 30 days in 2025.
Nate Goergen, a partner at Davis Graham & Stubbs, told Law Week that Congress passed the act in an effort to prevent and combat money laundering, terrorist financing, tax fraud and other illicit activities.
Jackie Benson, a member at Sherman & Howard, thinks the legislation was an attempt by the federal government to bring the U.S. up to a similar standard of other countries in Europe that track the ownership of companies organized in their countries.
The act also creates another tool for enforcement agencies to go against people and businesses they suspect of wrongdoing, Marc Painter, a partner at Holland & Hart, told Law Week.
The act creates new disclosure requirements for certain companies and partnerships, and it will largely affect smaller entities across the nation and Colorado.
“Basically, what it requires is companies that are organized in the United States, or through certain tribal nations, need to report their beneficial ownership to FinCEN, which is part of the Department of Treasury, through an online filing system,” said Benson.
The act refers to the companies it applies to as “reporting companies,” which Goergen said includes any corporation, LLC and any other form of entity created by filing with a secretary of state or similar office under the laws of a state or Native American tribe; and any corporation, LLC and any other form of entity created under the laws of a foreign country and registered to conduct business in the U.S. or tribal jurisdiction.
The initial report that a business needs to file with FinCEN will need to include information about the reporting company itself, and the company’s “beneficial owners.” Goergen said that a “beneficial owner,” as defined by the act, is an individual that directly or indirectly owns or controls at least 25% of the total ownership interests of the reporting company or exercises substantial control over the reporting company.
On the company entity side, the business will need to report its full legal name, any trade names or DBAs, the street address of its principal place of business or its primary location in the U.S. if it’s a foreign business, jurisdiction of formation or state or tribal jurisdiction in which it’s registered if it’s a foreign company and its tax identification number or unique tax ID number if it’s a foreign company, according to Goergen.
For beneficial owners, Goergen said the information FinCEN requires includes their full legal name, date of birth, current residence or for company applicants, their business street address, a unique identifying number from an identification document, like a passport or driver’s license, or a FinCEN identifier and an image of the identification document.
Attorneys may also need to register on the report if they were the agent that formed the company.
“For newly formed companies, you have to report who has organized the company,” said Benson. “In a lot of cases that’s the law firm. So that may be the attorney, or a paralegal or both.”
But there is a way to make the process swifter for attorneys, paralegals or business professionals who might be involved with several companies.
“You can get a FinCEN identifier, where you basically go into FinCEN and provide information about your name and your birth date, your address and all of that information, and then they give you a number,” said Benson. “And so thereafter, you can just report the number.”
A Broad, but Prescribed, Application
While the act applies to a broad swath of companies, it is targeted at smaller firms, where details around ownership and control of the business may not be as well known as other larger or more public companies. In total, there are 23 types of entities that are exempt from the CTA, but some of those exemptions are more common than others.
“Generally, there are exceptions for companies where their ownership is already well known to the government through some other mechanism, because they’ve already got filing obligations,” said Benson. “Entities like chartered banks and chartered insurance companies, public utilities, brokers and investment advisors that are registered with the Securities and Exchange Commission, companies that are registered with the SEC, there’s some other exemptions like that.”
One specific exemption that Benson thinks will probably be a common one is the large company exemption.
“That applies to companies that have more than 20 full-time employees in the United States, a physical presence in the United States and on their prior year’s U.S. tax return, they had gross receipts or sales exceeding $5 million generated in the United States.”
An exemption that Goergen thinks will be frequently used is the subsidiary exemption, which exempts an entity from reporting if its ownership interests are controlled or wholly owned, directly or indirectly, by one or more other entities that are subject to certain CTA exemptions.
“For example, each directly or indirectly wholly owned subsidiary of an entity that qualifies for the CTA’s large operating company or public company exemptions, will also be exempt from reporting,” said Goergen. “Note that subsidiaries of certain exempt entities – like money transmitting or money services businesses, pooled investment vehicles, entities assisting a tax-exempt entity and inactive entities – will not qualify for the subsidiary exemption.”
Despite there being a number of exemptions, Goergen told Law Week that the devil is in the details, as entities will need to satisfy all of the conditions specified in the reporting rules, which often include multi-prong tests.
“After applying those tests, we have found many businesses that would be considered ‘large operating companies’ in any other context may not be ‘large operating companies’ for purposes of the CTA exemption,” said Goergen. “It is therefore critical that before a company relies on any exemption to reporting under the CTA, it carefully analyzes each of the individual prongs applicable to such exemption to confirm that each prong is satisfied.”
Who’s a Beneficial Owner?
Where the act can get complicated for some businesses is determining who exactly qualifies as a beneficial owner, particularly for entities that might have more complicated leadership structures or financing.
Beneficial owners only have to qualify under one prong of the two, either the ownership percentage or the decision making prong.
Benson said that for many small businesses, where the ownership structure is simple, the filing and disclosure obligations are fairly simple and straightforward.
“But for more complex structures, complex real estate structures or family office structures, where you’ve got a lot of different entities and complex ownership… this can be a pretty complex analysis to go through to figure out exactly who qualifies as a beneficial owner,” said Benson.
In general, FinCEN is looking for companies to report an actual person who has control, noted Benson.
“For a lot of companies with complex structures, that’s a pretty complicated analysis,” said Benson. “So if you haven’t started figuring that out, you need to sit down and run through the numbers and make sure you’ve got all the information so that you can make those filings.”
The Current State of Compliance
Businesses formed this year are already required to comply with the CTA, and have a 90-day deadline to file following their formation. But for existing businesses, the deadline is Jan. 1, 2025, and some companies have been more active in filing reports than others.
Painter told Law Week that a ton of people, including lawyers, don’t know about the CTA.
“There are tons and tons, I would say the vast majority of small businesses don’t know that this [act] is there,” said Painter.
Painter said that Holland & Hart has a dedicated team working on CTA compliance, and they’re already seeing a lot of people responding to them and asking for help. But there are still many companies that haven’t responded.
“One of the worries is that they’re going to come to us after Thanksgiving, because we’re not going to be able to help you at that point,” said Painter. “Because we know that it’s going to be an exponential rise in the number of people who want help later in the fall.”
Benson said that companies that formed this year are more aware of it, as they’ve had to get into compliance pretty quickly. But she said it’s a mixed bag for existing companies.
“I think a lot of folks have been kind of waiting to see if it is deemed unconstitutional, or if Congress changes the law, or if there’s a delay, and they decide to delay implementation, kind of dragging their feet to see if anything changes,” said Benson. “I think there’s a huge portion of the population that’s subject to the statute that really hasn’t done anything yet. I’m anticipating a lot of phone calls on December 28.”
For companies that aren’t in compliance, the penalties can add up and escalate quickly. Fines can rise up to $500 a day, with potential penalties also including a two-year prison sentence and a fine up to $10,000, along with potential treble damages.
“If you’re involved in some other pattern of illegality, then they can do fines up to $250,000, up to $500,000 if it’s part of a pattern, imprisonment up to 10 years,” said Benson. “So if you really are involved in some sort of large-scale money laundering, trafficking, some sort of bad thing, the CTA gives the federal government one more thing to tack on, and it multiplies all of the penalties, and it gives them one more thing to investigate.”
The Future of the Act
The act has already been challenged several times across the country, with one injunction given to an individual party in North Alabama. But despite the ongoing court cases, Painter doesn’t think people should put filing their report off.
“I don’t think you’re going to see a resolution of a nationwide injunction this year,” said Painter. “And I think the longer people put it off, the more likely it is they’re going to get the end of the year and then have a problem complying.”
Ultimately, Painter thinks that the Supreme Court will address the CTA, particularly with the recent overturning of the Chevron deference doctrine in Loper Bright Enterprises v. Raimondo.
“There’s certain things that FinCEN did in adopting regulations under the CTA that are beyond the scope of the CTA, and even before the repeal of the Chevron doctrine that might have been questionable,” said Painter. “For instance, the statute doesn’t talk anywhere about a picture ID, but the regulations say you have to submit either a passport or a driver’s license or similar form of identification, and you have to upload that as part of your filing.”
“When they came out with that ruling, you could just see that that ruling was going to be a basis for contesting overreach by the Treasury on the regulations here,” added Painter.