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CORPORATE TRANSPARENCY ACT (CTA)

The Corporate Transparency Act (CTA) was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA mandates that millions of entities report their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN).

Beneficial ownership information refers to the details about individuals who ultimately own or control a legal entity, such as a company, trust, or partnership. This information is important for transparency, accountability, and preventing activities like money laundering, tax evasion, and corruption.

  1. Purpose: The purpose of collecting and maintaining beneficial ownership information is to identify the actual individuals who have significant control over or benefit from an entity, even if those individuals are not listed as the formal owners. This helps regulatory authorities, law enforcement agencies, and other stakeholders to understand the true ownership structure.  

  2. Disclosure: Many countries and jurisdictions require legal entities to disclose their beneficial owners to relevant government agencies. This information may be stored in a beneficial ownership register or database.

  3. Identification of Beneficial Owners: Beneficial owners are generally individuals who directly or indirectly own a significant portion of the entity's shares or voting rights, have the ability to influence decisions, or benefit from the entity's operations. This can include individuals who hold more than a certain percentage of ownership, hold key executive positions, or exercise significant control.

  4. Information Collected: The information collected for beneficial ownership typically includes names, addresses, dates of birth, nationality, and details of ownership or control. The exact information required can vary by jurisdiction.

  5. Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations: Beneficial ownership information is closely tied to AML and KYC regulations. Financial institutions and businesses that deal with money and assets are required to conduct due diligence to verify the identities of their customers and ensure they are not involved in illegal activities.

  6. Privacy and Security: While transparency is important, there are concerns about the privacy and security of beneficial ownership information. Some jurisdictions strike a balance between disclosure and protecting the personal information of beneficial owners.

  7. International Standards: International organizations such as the Financial Action Task Force (FATF) set standards and guidelines for beneficial ownership disclosure to ensure consistency across countries in combating financial crimes.

  8. Penalties: Failure to provide accurate and timely beneficial ownership information can result in penalties, fines, or legal consequences for the entity and its responsible parties.

  9. Changes and Updates: Entities are typically required to keep their beneficial ownership information up to date, reflecting any changes in ownership or control.

  10. Trusts and Complex Structures: Beneficial ownership can be more challenging to determine in cases involving trusts, complex ownership structures, and offshore entities. Some jurisdictions have specific regulations addressing these complexities.

 

Examples of a beneficial owner include:

  • John owns 75% of the shares of ABC Inc. His name is listed on the company's shareholder records, and he has the right to vote and receive dividends. John is the direct beneficial owner of these shares.

  • Sarah owns a trust that holds 60% of the shares of XYZ Corp. While her name isn't directly on the shareholder records, she is the beneficiary of the trust and enjoys the benefits of ownership, including potential dividends and voting rights. Sarah is the indirect beneficial owner of these shares.

  • Sarah is a limited partner in a real estate development partnership. Although she doesn't have direct control over the partnership's operations, she benefits from a share of the profits generated by the partnership's projects. Sarah is a beneficial owner of her share in the partnership.

  • The reporting company is a corporation owned by four individuals who each own 25 percent of the company’s ownership interests (e.g., shares of stock). Four other individuals serve as the reporting company’s CEO, CFO, COO, and general counsel, respectively, none of whom hold any of the company’s ownership interests.

In this example, there are eight beneficial owners. All four of the individuals who each own 25 percent of the company’s ownership interests are beneficial owners of the company by virtue of their holdings in it, even if they exercise no substantial control over it. The CEO, CFO, COO, and general counsel are all senior officers and therefore exercise substantial control over the reporting company, making them beneficial owners as well.

 

Who is required to report under the CTA’s BOI reporting requirement?

All domestic and foreign entities that have filed formation or registration documents with a U.S. state (or Indian tribe), unless they meet one of 23 enumerated exceptions including:

  • Large operating entities that meet all the following criteria:
    Employ more than 20 people in the U.S.
    Had gross revenue (or sales) over $5 million on the prior year’s tax return
    Has a physical office in the U.S.

  • Publicly traded companies that have registered under Section 102 of SOX

 

When must companies file?

  • New entities (created/registered after December 31, 2023) — must file within 30 days

  • Existing entities (created/registered before January 1, 2024) — must file by January 1, 2025

  • Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports – must file within 30 days.

 

What information do companies need to report?

  • Each company must report the information below.

  • Full legal name of the reporting company and any trade or DBA names

  • Business address

  • State or tribal jurisdiction of formation or registration

  • IRS taxpayer identification number (TIN)

 

In addition, each reporting company must report the following details on its beneficial

owners and, for newly created entities, its company applicant(s):

  • Name

  • Birthdate

  • Address

  • Unique identifying number and issuing jurisdiction from an acceptable identification document (and image of such document)

 

What are the penalties for noncompliance with the statue?

  • Civil penalties are up to $500 per day that a violation continues.

  • Criminal penalties include a $10,000 fine and/or up to two years of imprisonment.

 

While this is not a tax issue per se, we wanted to make you aware of the requirements for small businesses. Even if you are a Schedule C, formed as an LLC, you are subject to the reporting requirement. The form to file with FinCEN has not yet been released, but it will only be available online, no paper form will be available for this reporting.

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