Article by: Trey Ferguson and Aaron Arnette
Understanding the Corporate Transparency Act
CNBC recently ranked North Carolina the nation’s best state for business in 2022, citing not only the state’s thriving economy but also the state’s “long track record in innovation” and it’s access to capital. It is no wonder then why so many eager entrepreneurs want to set up shop in the Old North State.
While starting and maintaining a business in North Carolina has become increasingly attractive, recent legislation adds additional reporting requirements that new and experienced business owners need to understand to ensure their continued success.
On January 1, 2021, Congress passed the Corporate Transparency Act (“CTA”), as part of the National Defense Authorization Act. The CTA will require most small and medium-sized businesses to report specific information about the ownership of their businesses. This Article discusses the basics of compliance with the CTA.
What is the CTA?
The CTA was enacted as part of a larger piece of anti-money laundering legislation that directs the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to create a national registry of beneficial owners of certain business entities. The goal of this registry is transparency—requiring the disclosure makes it more difficult for shell companies to facilitate illicit activities, like money laundering or financing terrorism.
What does the CTA require?
The main requirement of the CTA is reporting identifying information to FinCEN.
An entity that is required to report must disclose the entity’s legal name, including d/b/a (doing business as) names, the street address, the jurisdiction where the entity was formed or registered, and the entity’s tax ID number.
The entity must also report its beneficial owners’ information, including legal names, date of birth, residential street address, and the ID number from a state-issued ID (along with a picture of that ID).
A beneficial owner is an individual who has substantial control over the business or who owns or controls at least 25 percent of the ownership interest in the entity. Substantial control includes individuals that serve as a senior officer of the company, have the power to appoint or remove senior officers, or have authority to direct important matters of the company.
The CTA also requires the entity to report identifying information about the entity’s applicant. Applicants are the individuals who make the decision to create or register the entity with the Secretary of State—which includes an individual incorporator or organizer.
Who must report?
Any legal entity that is formed by filing with the Secretary of State’s office is a potential “reporting company” for the purposes of the CTA. That includes most corporations, LLCs, partnerships, and certain trusts. Because the CTA is retroactive, entities formed before the CTA’s enactment (January 1, 2021) are subject to its reporting requirements.
While there are twenty-three exemptions to the reporting requirements, those exemptions generally apply to larger corporations that are already subject to heavy regulations (i.e. banks, insurance companies, investment funds, public companies, etc.).
That said, the CTA also exempts “large operating companies” that (1) employ more than 20 full-time employees, (2) previously filed federal income tax returns showing $5 million in gross receipts or sales, and (3) have an operating presence at a physical office with the United States.
When does my business have to comply with the CTA?
While the CTA was enacted January 1, 2022, it is not immediately effective until Treasury finalizes the regulations—which is expected to happen later this year. While Treasury has one year to issue regulations, existing businesses must be prepared to submit their identification information within two years from the adoption of Treasury’s regulations.
What are the current proposed regulations?
Currently, Treasury has proposed regulations for the CTA that greatly expands the scope of “beneficial ownership” to include all types of ownership interests (i.e. convertible debt, warrants, rights to purchase, put and calls, etc.).
Additionally, the regulations also include sole beneficiaries of a trust and settlors of revocable trusts as “beneficial owners,” who would be subject to the CTA’s reporting requirements.
Because of the expansive reporting requirements and the sensitive nature of the information disclosed, the CTA has strict confidentiality, security, and access restrictions. FinCEN will only be authorized to disclose the information contained in its registry for the purposes of national security or law enforcement.
What if my business doesn’t comply?
The willful failure to report or providing false beneficial ownership information is punishable by a civil penalty up to $500 per day, plus potential criminal fines of $10,000 and up to two years in prison.
Knowingly disclosing or using the beneficial ownership data for an unauthorized purpose is punishable with a $500 per day civil penalty and possible criminal fines up to $250,000 or up to five years in prison, or both.
While the CTA regulations are not yet finalized, business owners can expect that they must comply with the reporting requirements soon and should prepare now. While the CTA’s reporting requirements seem like a headache for current and future business owners, connecting with the right legal partner for your business needs can greatly ease that administrative burden.
The information in this Article is provided solely for informative purposes and is not intended to be legal advice nor relied on for any legal purposes.
Sumrell Sugg, P.A. is a regional legal firm that provides clients with first-rate services in a cost-effective manner. Whether clients are individuals, corporations, or local governments and municipalities, our firm delivers on an undeviating promise of service. For more information, visit us at www.nclawyers.com.