Corporate Transparency Act: How to Prepare Your Business for New Reporting Requirements

Apr 07, 2022

The Corporate Transparency Act, or CTA, creates new reporting requirements for many companies operating in the U.S., especially small businesses.

It was passed as a part of the 2021 National Defense Authorization Act, designed to protect the U.S. financial system from corruption.
The new U.S. regulatory requirement is likely to come into effect in late 2022 or early 2023.

Here’s what existing businesses need to know to prepare for the Corporate Transparency Act.

Who Is Affected by the Corporate Transparency Act?

The first step to complying with the Corporate Transparency Act is determining whether your company is considered a “reporting entity.”

The Corporate Transparency Act regulates both U.S. domestic entities and foreign entities doing business in the U.S; it requires these entities to disclose certain information to a yet-to-be-organized government agency overseen by the Financial Crimes Enforcement Network (FinCEN).

Any entity that needs to file a formation or incorporation document with a Secretary of State or similar government agency during the entity formation process will be considered a “reporting entity.”

This includes the following types of entities:

For any entities that fall under this definition (“reporting entities”), FinCEN reports will need to be filed on behalf of:

  • The company or entity itself
  • Beneficial owners (any individual who has substantial direct or indirect control of the reporting company or who owns or controls at least 25% of the ownership interests of the reporting entity. This is known as the “substantial control” test)
  • Company applicants (any individual who files the FinCEN report on behalf of the reporting entity)

In some cases, beneficial owners and company applicants may be able to include their information on the entity’s report and avoid filing reports individually.

The following entities are exempt from reporting under the Corporate Transparency Act:

• Nonprofits
• Publicly traded companies
• Entities that are already required to file reports with FinCEN
• Entities that are already required to register with the SEC
• Dormant companies that don’t own any assets Domestic companies with 20+ employees and $5 million or more in annual gross revenue

What Do Businesses Need to Report Under the Corporate Transparency Act?

Reporting entities are required by the Corporate Transparency Act to file accurate information about the company, its applicants, and beneficial owners.

Reporting entities must submit the following information:

• Full name of the entity
• The entity’s trade names or DBA (doing business as) names
• Street address of the business
• Jurisdiction of company formation
• Taxpayer Identification Number or Employer Identification Number (EIN)

The company’s beneficial owners and company applicants must submit the following information:

• Full legal name
• Date of birth
• Current address
• Active government-issued ID, driver’s license, or passport

You may be wondering where this information will be stored. Will the Corporate Transparency Act affect the privacy of businesses and their owners?

“The information contained within the FinCEN database can only be accessed by federal agencies, state agencies with a court order, and financial institutions with the company’s consent,” says Chris Martin, associate attorney at Gordon Law Group.

“The public will not be given access to this information; the CTA merely allows the federal government easier access to an entity’s financial data.”

This information will allow the government and financial institutions to identify shell companies responsible for fraud and illegal transactions.

When Do Businesses Need to File These Reports?

When Do Businesses Need to Report?

Despite the Corporate Transparency Act being passed in 2021, FinCEN’s infrastructure to collect information has not been set up yet. We expect the reporting system to be in place in late 2022 or early 2023.

  • Entities that were formed before FinCEN issues the final CTA regulations will have 1 year to submit their initial reports after that date.
  • Entities formed after the effective date will have to report within 14 calendar days of formation or incorporation.
  • Entities that were previously exempt from CTA reporting must file an initial report within 30 days of the company no longer being exempt.

An individual or company who violates these reporting requirements can be subject to civil penalties up to $10,000, 2 years in prison, or both.

Reporting companies also must submit updated reports to FinCEN within a specific time frame:

  • Changes to previously reported information should be filed within 30 days of the change
  • Updates to incorrect information should be filed within 14 days of learning of the error

How to File FinCEN Reports Under the Corporate Transparency Act

FinCEN is still at work establishing a system to collect this information from companies. In the meantime, it’s best for “reporting entities” to begin preparing now.

We understand filing can be overwhelming. That’s where our experienced team of business attorneys can step in. Allow Gordon Law Group to ensure you’ve checked every box to comply with all the requirements of the Corporate Transparency Act!

Contact Gordon Law Group

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