December 14, 2023
Here at Mindful Counsel®, our job is to educate our clients on the important things they need to know about protecting their brands and their legacies. Enter: The Corporate Transparency Act.
The Corporate Transparency Act (CTA), enacted by Congress on January 1, 2021, is a pivotal piece of legislation with profound implications for business owners in the United States. As we approach the reporting mandate commencement on January 1, 2024, it becomes imperative for business professionals to familiarize themselves with the intricacies of this law and its far-reaching consequences.
The primary objective of the CTA is to combat financial crimes and foster a fair and secure business environment. To achieve this, the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of Treasury, is tasked with establishing a national database of beneficial ownership information (BOI) for almost every business entity in the country.
Under the CTA, every corporation, limited liability company (LLC), and other business entities formed through government filing must report their BOI unless specific exemptions apply. Exemptions primarily encompass inactive companies and those operating in highly regulated industries reporting similar data under other laws.
Inactive companies, as defined by specific criteria, are exempted from reporting. However, the vast majority of U.S. companies, irrespective of size, are obligated to report their BOI to FinCEN during the calendar year 2024.
The CTA establishes two standards for identifying individuals whose information must be reported: those owning or controlling at least 25% ownership interest and those with substantial control over the organization. The latter is a nuanced concept, with individuals such as senior officers, decision-makers, and those with significant control falling under its purview.
Due to the evolving nature of the “substantial control” standard, companies are advised to err on the side of caution and potentially over-disclose until further regulatory guidance is provided by FinCEN or the matter is adjudicated by the courts.
All existing companies must report their BOI during the calendar year 2024, with an ongoing obligation to update information within 30 days of any changes.
For businesses formed after January 1, 2024, a 30-day window is provided to submit BOI to FinCEN. Additionally, new companies must include information about filers and advisers involved in preparing and submitting chartering documents.
The CTA imposes substantial penalties for organizations found in non-compliance or providing false information. Penalties include civil or criminal fines of up to $500 per day (up to $10,000) and the possibility of up to two years in prison. The severity of penalties is contingent upon factors such as the nature of non-compliance and the falsified information.
While the compliance requirements of the CTA may appear intricate, a proactive approach in maintaining accurate records and timely reporting will not only ensure adherence to legal obligations but also mitigate the risk of facing penalties. Business owners are encouraged to seek competent legal counsel to navigate these new obligations effectively.
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