Blog

By Purple Fox Legal

November 16, 2022

Part of being an entrepreneur means learning about new laws, such as The Corporate Transparency Act. While this responsibility may seem tedious, it’s incredibly important. Non-compliance with the law can cause any business major problems that are costly to correct. These problems can be prevented if small businesses have systems and procedures in place to keep track of new legislation that is relevant to business operations and what actions are needed to remain in compliance. 

About The Corporate Transparency Act

The Corporate Transparency Act was enacted by Congress through the override of a Presidential veto back in January 2021 as part of the National Defense Authorization Act (NDAA). The purpose of the Corporate Transparency Act was to protect the United States financial system from being used from money laundering and other illicit activities, including the financing of terrorism. 

Generally, people who engage in money laundering and other illicit activities take the precaution to not do it in their own name. Instead, they’ll use the cover of a Limited Liability Company (LLC) or other business entities. This actually makes it more difficult for law enforcement to find out who the individuals are behind these entities because when they were formed in the United States, or in the event that the entity was created in a foreign country and registered to do business in the United States, they aren’t required to provide the names of the individuals who ultimately own or control the entity. As such, the Corporate Transparency Act was drafted and passed.

New Reporting Requirements for Small Businesses

The Corporate Transparency Act requires reporting companies to disclose information about their beneficial owners. The CTA defines reporting companies as any corporation, LLC, or similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States. 

Defining Beneficial Owners

The CTA defines beneficial owners as:

1. Any individual who, directly or indirectly, exercises substantial control over the corporation, LLC or legal business entity, or 
2. Owns control of at least 25% equity in the entity, or 
3. Receives substantial economic benefits from the assets of a corporation or LLC. 

Information Required

These reporting companies must file beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN). This information includes:

• Full legal name, 
• Any trade name, 
• Current address, 
• The jurisdiction of formation, and 
• The Internal Revenue Service Taxpayer Identification Number (TIN) (including an Employer Identification Number) of the reporting company. 

Reporting Requirements for Foreign Companies

In the case where a foreign reporting company hasn’t been issued a TIN, a tax identification number by that foreign jurisdiction and the name of that jurisdiction will be required. The division imposes civil penalties and even authorizes criminal penalties, including a fine, prison term of up to 3 years, or both, for anyone who provides false or fraudulent beneficial ownership information, or for wilfully failing to provide complete or updated beneficial ownership information.  

Entrepreneurs Should Consider Getting Professional Advice

For entrepreneurs and small businesses, the Corporate Transparency Act means that their regulatory needs have increased. This is no small thing as most businesses are small businesses run by entrepreneurs who wanted to pursue their American dream. FinCEN estimated about 32.6 million businesses would fall under the category of a reporting company with an additional 5 million added each year from the time the CTA was passed. We want to emphasize the importance of this act once again to you if you’re an entrepreneur or small business owner. 

Be sure to keep a close eye on the development of this regulation, as the regulatory burden it imposes carries significant penalties for failing to comply. If you have questions about how this new legislation affects your business, you should consider hiring a business attorney to help you navigate the new reporting requirements.