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BEWARE – The “wait and see” attitude about the Corporate Transparency Act is over!


This new law applies to almost ALL businesses. The Corporate Transparency Act (“CTA”), effective January 1, 2024, requires certain businesses to report information to the Financial Crimes Enforcement Network for persons with “substantial control” over the business or 25 percent or more of the equity in the business.


The CTA’s intent is to end the position of the U.S. as a haven for “shell” companies used to commit crimes such as money laundering, terrorist financing, financial and tax fraud, and other domestic and international illicit activity and corrupt practices. There are steep, escalating fines and possible jail time for noncompliance.


Ignorance of the law is no excuse and this law applies to small businesses too. Like it or not, the CTA has been thoroughly vetted and is in effect. Compliance is mandatory and advisable. The most far-reaching federal business entity law ever enacted, the CTA impacts an estimated 32 million current businesses, plus millions more newly formed businesses each subsequent year.


Information to be reported includes direct and indirect, human, beneficial ownership, control, and service provider information to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury will be used by federal, state, local, and tribal law enforcement authorities to streamline investigations, bypassing the “shell game” historically posed by multiple levels of business entity ownership and affiliation.


The information to be reported to FinCEN (“beneficial owner information,” or “BOI”) is certain personal identifying information, which includes (1) full legal name, (2) date of birth, (3) residential (or sometimes business) physical commercial street address, and (4) an image of an acceptable government-issued ID (a U.S. passport or state-issued driver’s license) that includes both an ID number and the person’s photograph.  This reported information must be kept current and accurate with FinCEN by the reporting company on an ongoing basis.


Steep, escalating fines ($500 per day up to $10,000 per violation) and possible jail time (up to two years) can be imposed for not timely and properly complying with the CTA’s requirements. The failure to timely file a required initial report could result in up to a $10,000 fine but subsequent events that would necessitate an amendment to such required but missing filing, if the initial report been made, may cause penalties to accrue—meaning that a failure to file an initial report may result in fines well in excess of $10,000 before an initial notification of violation from FinCEN to the reporting company. Also, the intent of the reporting company and its agent about noncompliance will be a factor in FinCEN’s assessment of possible criminal penalties.


The CTA’s “large operating company” exception is an exception to the CTA’s reporting requirements for businesses that meet all three of the following criteria:

The business must have a commercial, physical street address in the United States.

The business must have twenty-one or more full-time employees (excluding full-time equivalent employees, part-time employees, independent contractors, and leased employees).

The business must have filed a prior year’s federal income tax return demonstrating more than $5 million in annual, U.S.-only, gross receipts or sales.


In addition, by necessity, every business entity formed on or after January 1, 2024, will not initially qualify for this exclusion because such business entities will not have the prior year’s tax return necessary to establish the gross revenue part of the above criteria. The same is true of virtually all business entities formed between January 1, 2023 and December 31, 2023. Further, many large portfolios of business entities will likely not meet this exception because employees of the portfolio’s operations are typically consolidated into one, or a few, of the portfolio’s business entities, with the remaining business entities not having employees, thus failing the employee prong of the above criteria. Under FinCEN’s BOI Final Rule, employee head count may not be attributed across affiliated entities for purposes of meeting the employee count threshold—each business entity must stand alone in this respect.


These factors, in combination, could cause a simple act of not reporting to turn into the accrual of tens of thousands of dollars, or even hundreds of thousands of dollars, in fines by the time FinCEN identifies the violation and pursues collection. This will be particularly true in the first year of implementation, when 32.6 million reporting companies are projected to require reporting, with five million additional reporting companies being added each year thereafter.


The Corporate Transparency Act is a huge shift in the beneficial owner reporting regimes in the United States, changing long-established norms. Tens of millions of unwitting U.S. business entities, and their beneficial owners, will become bycatch in FinCEN’s dragnet designed to catch nefarious actors hiding behind the “corporate veil.” Just as anonymity in the business entity structure has been pierced by the CTA, so has anonymity in the Act’s compliance, with data points aiding in FinCEN’s ultimate enforcement regime, including FinCEN’s discovery of those choosing not to comply.


Excerpted from ABA BUSINESS LAW SECTION Business Law Today

The Corporate Transparency Act: Deniers Beware

William E H Quick

Jul 10, 2023

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