Compliance Alert: What You Need to Know About the Corporate Transparency Act

The Corporate Transparency Act (also known as the Corporate Transparency Act of 2024, as that is the year the law took effect) recently became law.  All business owners must have a full understanding of the law to ensure compliance and avoidance of significant fines and penalties.

However, before we get started it should be noted that as of this writing, an Alabama federal district judge has ruled that the law is unconstitutional, a decision likely to be challenged in the Eleventh Circuit of Appeals.  Critically, the ruling only applies to the plaintiffs in this case. All other companies must still comply with the Corporate Transparency Act until further clarification, if any, is provided by the courts.

What is the Corporate Transparency Act?

The Corporate Transparency Act is a law that received bipartisan support in Congress. It creates a database providing law enforcement agencies with information about the beneficial owners of companies operating in the U.S. A beneficial owner is a person who enjoys the benefits of owning a company, whether or not they actually hold legal ownership of that company. In the past, financial institutions had to compile this information under the terms of the Bank Secrecy Act, an ad hoc situation that resulted in significant limitations to the information available.

Requiring companies themselves to report their beneficial owners will help law enforcement more effectively target shell companies. Such companies sometimes allow criminals to engage in money laundering and other such acts.

Key Corporate Transparency Act Terms

The law’s most relevant terms for most business owners are the Corporate Transparency Act reporting requirements. They require reporting companies to submit beneficial ownership reports to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). A beneficial ownership report provides FinCEN with information about a company’s owners.

Who Will Be Affected by the CTA?

The Corporate Transparency Act affects two types of companies:

• Domestic reporting companies – These include LLCs, corporations, and any company created by filing documents with a secretary of state or an office serving the same role.
• Foreign reporting companies – These include any non-U.S. company that has filed with a secretary of state or other such office to conduct business in the U.S.

Some types of companies are exempt from the Corporate Transparency Act. FinCEN offers a list of 23 types of entities that don’t have to comply with the law.

Don’t simply assume you’re exempt. Investigate the matter further if you’re unsure whether yours qualifies as an exempt company.

Who Is Considered a Beneficial Owner of a Company?

Per FinCEN, a beneficial owner is someone who:

• Owns or controls 25 percent or more of a company’s ownership interests, or
• Exercises substantial control over a company

Individuals exercise “substantial control” of a company if they fit into one of the following categories:

• A senior officer
• Someone with the authority to remove an officer or a company’s majority of directors (or a related corporate body)
• Someone whose role involves making important decisions for a company
• Anyone else who, per the FinCEN Small Entity Compliance Guide, has some form of relevant substantial control over a company

“Ownership interests” in a reporting company include these categories:

• Equity, stock, or voting rights
• Capital or profit interest
• Convertible instruments (instruments that can be converted into one of the above categories)
• Option or privilege
• Catch-all, meaning any other means (such as a contract) that establishes ownership of a company

According to FinCEN, someone may qualify as an important decision-maker at a company if they contribute to or make decisions on such matters as:

• The general nature of a business
• Entry into contracts
• Sale/leasing/mortgaging of a business or its assets
• Major investments and expenditures
• Employee compensation
• Reorganization

Determining who does and doesn’t qualify as a beneficial owner can be challenging. You don’t want to wait until the last minute to report beneficial ownership information. Consult with a lawyer immediately to be safe.

What and When Must Companies Report?

You may file a report online via FinCEN’s website. The form will provide you with more information about the details you need to include in the report. Generally, a report should include identifying information about a company’s beneficial owners.

The date by which a company has to file a beneficial ownership report depends on when the company became officially registered to do business. If a company became registered to do business before January 1, 2024, its owners have until January 1, 2025, to file reports.

The timeline is stricter for companies registered to do business on or after January 1, 2024, but before January 1, 2025. Upon receiving official notice of a company’s registration, its owners have 90 days to file reports. The owners of companies registered on or after January 1, 2025, have 30 days to file reports after public notice of a company’s registration.

Potential Consequences for Non-Compliance

The penalties for failing to comply with the Corporate Transparency Act can be quite serious. They include:

• A penalty of up to $500 for every day that a company that has not complied with the law fails to address the issue
• Up to $10,000 in fines, up to two years in prison, or both

FinCEN provides several resources for individuals and companies to learn more about complying with the law. Along with the Small Entity Compliance Guide linked above, FinCEN also offers email updates to those who sign up for them. Consider signing up to ensure you’re on top of the latest developments.

Get Help from Our Business Attorneys Now

As a business owner, you already have enough on your plate without trying to file your own beneficial ownership information report. Yet, at the same time, you could incur penalties if you don’t file a report on time. Moreover, the law may leave some room for interpretation in certain circumstances. It may not always be clear when an individual or party qualifies as a beneficial owner.

Don’t try to deal with these complexities alone. Instead, turn to Alward Fisher for help. We’re happy to help your organization comply with the CTA. A business attorney with our firm can file a report on your behalf and answer your questions about how the CTA may affect your company. We can complete a full compliance assessment, either in person or virtually, to ensure that your business is adhering to the laws and regulations so you can avoid the penalties.

Get started today by contacting us online for an initial consultation.