Lifting the Veil: An In-depth Examination of Enhanced Disclosure on Private Companies Under the Corporate Transparency Act
In anticipation of the broad, encompassing Corporate Transparency Act coming into effect in fiscal year 2024, virtually all of the new and existing entities conducting business in the United States must provide essential business and personnel information or face steep civil and criminal penalties.
What is the CTA?
The Corporate Transparency Act (CTA) was enacted as part of the National Defense Act for Fiscal Year 2021. The CTA mandates that millions of entities report their beneficial ownership information (BOI) as well as company applicants—for entities formed before and after January 1, 2024—to the Financial Crimes Enforcement Network (FinCEN).
Who does the CTA affect?
The Corporate Transparency Act will affect most entities that currently conduct business in the United States as well as every new entity registered after December 31st, 2023.
What critical business information must be reported under the CTA?
Under the CTA, all domestic and foreign entities that filed registration documents with a U.S. state or Indian Tribe must report critical business information such as:
Full legal name of reporting entity, trade, or DBA names
Business address
State or Tribal Jurisdiction of entity creation
IRS TIN
Who is considered a company applicant or beneficial owner and what information must be reported under the CTA?
Beneficial owners are individuals who exercise substantial control over a reporting entity or own, control at least 25% ownership interest in the reporting entity.
Company applicants are individuals that are primarily responsible for directing or controlling the filing of the document that creates the entity or who first registers the company to do business in the US.
For beneficial owners and company applicants, they must report:
Name
Birthdate
Address
Unique identifying number including the issuing jurisdiction from an acceptable ID document
When must CURRENT entities comply with CTA reporting requirements?
Current entities that were registered before January 1st, 2024 have until January 1st, 2025 to report information regarding their beneficial owners, company applicants, and essential business information or face steep civil and criminal penalties.
When must NEW entities comply with CTA reporting requirements?
New entities that are registered after December 31st, 2023 must file the same essential information as current entities regarding their beneficial owners, company applicants, and business within 30 days or face steep civil and criminal penalties.
Potential exemptions from CTA Filing
23 categories of exemptions (Full List of Exemptions).
Large entities with an active trade or business can be exempt if they employ more than 20 people in the U.S., had gross revenue over $5 Million in the prior year, and have a physical office in the U.S.
Additionally, publicly traded companies, banks, credit unions, are public accounting firms are exempt. See FinCEN’s compliance guide.
These are some entities that due to the nature of their work are highly regulated by the government and have already disclosed this information to a government agency.
Potential Penalties for Failure to Report
Civil and criminal penalties include a $500 per day penalty (up to $10,000) and in certain cases imprisonment for up to two years.
Here are some entities that will have access the reported information in the BOI database:
U.S. Federal agencies
State, local, and Tribal law enforcement agencies
U.S. Department of the Treasury
Financial Institutions using beneficial ownership information to conduct legally required customer due diligence
Federal and state regulators assessing financial institutions to conduct legally required customer due diligence
Foreign law enforcement agencies who submit qualifying requests for information through a U.S Federal agency.
Here are some potential scenarios that you and your company may face due to the enactment of the Corporate Transparency Act (CTA)?
Example 1
Let’s say that you are an existing U.S. domestic entity, Marc Molly Sarah Manufacturing, that is currently registered in the state of Minnesota. You have 3 beneficial owners: Marc, Molly, and Sarah as well as 1 company applicant, Bill. You employ 21 people at MMS and had $4.8 million in Gross Revenue during last year's tax return.
In this scenario, you would not be exempt from filing essential business, beneficial owner, and company applicant information under the Corporate Transparency Act (CTA) because you did not make more than $5 million dollars in Gross Revenue. Even though you have employed more than 20 employees and have a US office, you are still required to comply with CTA requirements by January 1st, 2025.
Bill would be required to report MMS essential business information.
Bill would also be required to report beneficial owner and company applicant information for Marc, Molly, Sarah, and Bill.
Let’s assume you miss the January 1st, 2025 filing deadline due to lost paperwork or poor organization. In anticipation of facing penalties, you scramble to pull together the essential information and report on January 26th, 2025. Due to the report being 26 days beyond the deadline you would assume that you would be penalized a total of $13,000 at a rate of $500/day.
$500 x 26 Days = $13,000
However, the maximum civil penalty is up to $10,000 so MMS Manufacturing would owe $10,000 in penalties.
Example 2
Let’s say that you are a long standing private foreign entity based in Beijing, China named Oriental Exports, that is registered in the state of South Carolina at an office in Greenville, SC. You have 1 beneficial owner Jennifer as well as 1 company applicant Marcus. You employ 50 people at your Greenville, SC office and had $25 million in Gross Revenue during last year's tax return.
In this scenario, you would be exempt from filing essential business, beneficial owner, and company applicant information under the Corporate Transparency Act (CTA) because you made more than $5 million dollars in Gross Revenue, employed more than 20 employees, and have a US office.
Example 3
Let’s say that you are a publicly traded foreign entity based in Berlin, Germany named Berlin Exports, that is registered in the state of South Carolina and has an office in Greenville, SC. You have 1 beneficial owner Phil as well as 1 company applicant Tim. You employ 10 people at your Greenville, SC office and had $4 million in Gross Revenue during last year's tax return.
In this scenario, you would be exempt from filing essential business, beneficial owner, and company applicant information under the Corporate Transparency Act (CTA) because you are a publicly traded company.
What this means for Arc Advisors LLC and Financial Service Firms/Personnel
There is still debate whether non-attorney tax professionals advising clients on the requirement of the CTA reporting could be considered unauthorized practice of law (UPL).
To avoid UPL violations, Arc Advisors’ current and potential clients are advised to seek advice from their legal counsel prior to advising/filing CTA reports.
For additional information concerning this alert, please contact:
Melody C. Horton or Maurice Niklos at (864) 502-8311.
The information contained herein is of a general nature and should not be construed as professional advice. The reader should also be cautioned that the alert may not be specific to the reader’s exact circumstances and needs and may require additional information. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.