The Corporate Transparency Act: What to Know

In 2021, Congress enacted the Corporate Transparency Act (“CTA”), which is intended to strengthen existing federal money laundering and tax fraud statutes by way of improving structural (i.e., ownership) transparency in business entities.

While governmental oversight traditionally focuses on big businesses and their related hot-button issues in any given period (e.g., corporate tax inversion), the CTA was crafted with small entities in mind. To wit, the CTA’s ostensible goal is to improve transparency with respect to these small entities by establishing them as Reporting Companies, requiring the reporting of their Beneficial Ownership Information (“BOI”), and recording their Company Applicants. The CTA will go into effect on January 1, 2024.

Who is affected?

Under the CTA, corporations, limited liability companies, business trusts, and limited partnerships are all potentially Reporting Companies and must abide by the CTA’s reporting requirements. A beneficial owner is defined for the CTA’s purposes as (1) anyone who, directly or indirectly, owns or controls at least 25% of the ownership interests of an entity registered to do business in the U.S.; or (2) someone exercising “substantial control” over that entity. The Company Applicant is the individual who reports the requisite information on behalf of the Reporting Company and its beneficial owner(s).

The CTA requires Reporting Companies and their beneficial owners to provide information to the Financial Crimes Enforcement Network (“FinCEN”), a subunit of the Department of the Treasury that collects and analyzes information regarding financial transactions to counteract domestic and international financial crimes.

What information is required?

A Reporting Company must report its (1) name; (2) any trade or DBA names; (3) street address; (4) jurisdiction of formation; and (5) Taxpayer Identification Number. Everyone who qualifies as a beneficial owner must report their (1) name; (2) date of birth; (3) residential address; (4) unique identifier number from a recognized issuing jurisdiction (e.g., Michigan Department of Licensing and Regulatory Affairs); and (5) a photo of said organizational document. The Company Applicant who reports this data will, in most cases, provide substantially the same information as a beneficial owner, albeit they may provide the corporate address in lieu of a residential one.

An obvious and immediate concern is the intimate nature of the required information, especially in the case of beneficial owners. This personal information is highly sensitive but will not be publicly accessible. Information uploaded to FinCEN will be stored on a secured government server, and access is restricted to law enforcement agencies and certain financial institutions.

When is reporting due?

The CTA comes into effect on January 1, 2024. Reporting Companies whose existence predates the effective date have until January 1, 2025, to file their initial reports, and covered entities incorporated, registered, organized, or otherwise brought into existence after the effective date must file their initial paperwork within 90 days after receiving formal notice of their existence. Reporting Companies must update FinCEN within 30 days of (1) a change to its beneficial ownership, such as a sale, merger, or acquisition; (2) the death of a beneficial owner; or (3) upon becoming aware of or having reason to know that incorrect, inaccurate, or false information was previously transmitted on its behalf. Failure to abide by this or other provisions may result in fines ranging from $500 – $10,000 per violation and up to two years in prison.

Where is information filed?

FinCEN is actively developing its online reporting portal located at https://www.fincen.gov/boi. Although the filing system will not be available until January 1, 2024, the site offers further information regarding beneficial owners, compliance guidelines, and potential exemptions.

The takeaway

If the CTA sounds far-reaching and potentially burdensome for small businesses, that is because it potentially will be. Most small businesses are law-abiding; however, even the best-intentioned legislation collaterally impacts those outside its stated scope, and the CTA will likely prove no different. The Department of the Treasury estimates that narcotics consortiums, racketeers, arms traffickers, human smugglers, money launderers, black-market financiers, and their ilk generate upwards of $300,000,000,000 annually because of their illicit activities, and it is believed these bad actors habitually abuse business organizations to further their conduct. So, while the government’s crackdown on rogue and fraudulent enterprises seeks to ensnare only a small percentage of the total number of American companies, the CTA’s reporting requirements will add another regulatory layer for the nation’s small businesses.

How can CMDA assist with CTA Compliance?

Attorneys in CMDA’s Business Law Group offer the necessary tools small businesses need to meet their obligations under the CTA with minimal disruption. Services include, but are not limited to, the following:

• Reviewing a company’s current status under the CTA and developing an individualized strategy to ensure compliance;
• Performing due diligence to address any compliance issues;
• Determining whether your company may qualify for an exemption from reporting;
• Assisting with accurately identifying Beneficial Ownership Information; and
• Serving as Company Applicant.

Please contact CMDA’s Business Law Group with any questions.

Matthew C. Wayne is an attorney in our Livonia office whose practice primarily focuses on municipal law, business disputes, and civil litigation. Additionally, he represents taxpayers criminally, civilly, and administratively before the Internal Revenue Service, the Michigan Department of Treasury, and other taxing authorities. Over the years, he has obtained favorable results for his clients in matters ranging from tens of millions of dollars in unreported income to proposed assessment of the trust fund recovery penalty, from non-filing of personal income taxes to offers in compromise, from audit reconsideration to failure to report foreign bank accounts, and everything in between. He may be reached at (734) 261-2400 or mwayne@cmda-law.com.