The Corporate Transparency Act and Its Requirements
by: Kyle McCutcheon
The Corporate Transparency Act (“CTA”) was enacted as part of the National Defense Authorization Act of 2021 and requires, in part, that the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) implement a reporting system whereby companies must disclose certain detailed information to the federal government about their “company applicants” and “beneficial owners.”
The purpose of the CTA is to help prevent and combat money laundering, terrorist financing, fraud, corruption, and other illegal acidity using the country’s financial system. A lack of uniform reporting requirements in the U.S. has made it difficult for investigating authorities to discover the true owners of shell and front companies. In the past, bad actors have nefariously used companies to hide their identities as they move money through the U.S. financial system, so the final rule recently issued contains new reporting requirements to aid law enforcement authorities to identify and investigate companies being used for illegal activities.
Under the CTA, every company must submit an initial report with certain identifying information regarding its company applicants and beneficial owners and then must file a subsequent report any time that information changes. A company applicant is an individual who is involved with the formation of a company and a beneficial owner is generally defined as an individual with at least a 25% ownership in, or who substantially controls, a company.
The information required to report includes the individual’s:
- full legal name
- date of birth
- current residential mailing address
- current residential home address
- unique identifying number, accompanied by supporting documentation (i.e., Driver’s License or U.S. Passport).
Pursuant to the final rule recently issued and a subsequent extension to the compliance deadline, a company created in 2024 has 90 days from the date it receives notice that the entity creation has become effective to submit its initial report to FinCEN. A company created prior to 2024 has until January 1, 2025, to submit its initial report. In addition, any changes to the information provided about a company applicant or beneficial owner must be updated within 30 days on an ongoing basis. Failure to comply could subject you to stiff penalties including civil fines up to $500/day not to exceed $10,000 or up to two years imprisonment, or both.
Pending Litigation
Notably, a U.S. District Court judge in Alabama recently ruled that the CTA is unconstitutional. The case was brought by the National Small Business Association and an individual business owner against the U.S. Department of Treasury alleging that the CTA disclosure requirements violate Article 1 of the U.S. Constitution as well as a handful of Constitutional Amendments.
The federal government asserted its foreign affairs and taxing powers as well as the Commerce Clause to justify its reporting regime under the CTA and to defend its actions in the lawsuit. However, the district court didn’t agree. In short, the court found that the CTA exceeds Congress’s power to legislate matters such as this—the act of incorporation or formation of a company—which are to be left to the states to legislate.
That said, the court’s injunction only prohibits the federal government from enforcing the CTA against the plaintiffs, so the CTA remains applicable to all other companies across the Nation. The federal government has appealed the decision to the 11th Circuit Court of Appeals.
What Now?
Again, the recent court decision only applies to those specific plaintiffs who brought the lawsuit. So, the CTA is still applicable to all other companies nationwide and it is important to comply. The potential penalties for noncompliance—potential fines and/or jail time—should not be taken lightly and companies should take steps towards timely compliance.
If you or a business owner you know has questions regarding the CTA, or need assistance to comply with its reporting requirements, call or email us today to schedule a consultation with Mr. McCutcheon.
Kyle McCutcheon is an Attorney at Provident Law®. His practice areas include business, real estate, and estate planning as well as advising church and nonprofit tax-exempt organizations. McCutcheon is licensed to practice law in Arizona and Missouri, and he can be reached at kyle.mccutcheon@ProvidentLawyers.com or at 480-388-3343.