How the Corporate Transparency Act Might Affect Your Washington Business
A new federal law became effective on January 1, 2024, requiring certain businesses to report information on beneficial owners to the federal government. If the law applies to your company, you only have until January 1, 2025, to comply with the filing requirements. Any willful failure to follow the law can result in steep fines and even in criminal penalties. In addition, you may have ongoing compliance obligations under the law any time beneficial ownership in your business changes. Since this is a new law, you must know the requirements well in advance of any deadline.
A corporate lawyer can advise you in matters of regulatory compliance. When you have an ongoing relationship with a corporate attorney, they can keep you posted on new laws you must follow and what you can do to comply with them. Without the right legal help, you may have no idea of the requirements you must meet, and your business can get into serious trouble quickly.
Congress often attaches various pieces of legislation to its annual “must pass” National Defense Authorization Act, which is exactly what happened in 2021 when it passed the Corporate Transparency Act. This piece of legislation aims to fight money laundering and other financial crimes by requiring businesses to submit information about their ownership to a federal agency. The CTA applies primarily to small businesses, and there may be consequences for not complying with the law. If your business has not already complied with the law, you have limited time to do so.
If you have any questions about whether the CTA applies to your business or how to comply with your obligations under the statute, you should contact a corporate attorney to learn more. Any new federal law that imposes new obligations on your company can present a challenge, and you must be prepared to navigate the new environment. The need for legal counsel from a corporate lawyer is even greater in light of the potential criminal penalties in the statute for non-compliance.
Why Congress Passed the CTA
A major problem for law enforcement was that anonymous shell companies have often been used to finance terrorism and other illegal enterprises. It had been very difficult for law enforcement to gather information on who owned these businesses, making it harder to detect illegal activity such as money laundering and financing criminal organizations.
Prior to the passage of the CTA, Congress had tried for the better part of a decade to pass legislation that enabled law enforcement to gather more information on beneficial business owners. Although the government needed this data, the burden had fallen on financial institutions to collect and report it pursuant to the Bank Secrecy Act. There is only so much that a financial institution can do, and it is far more effective if the businesses themselves self-report the data to law enforcement.
What Is the CTA?
The CTA is a law that requires your business to self-disclose information about your ownership to law enforcement. Under the CTA, a reporting company is required to provide the following information about each applicant or beneficial owner to FinCen:
- Full legal name.
- Date of birth.
- Current residential or business street address.
- A unique identifying number from an acceptable identification document (passport, driver’s license or other government issued identification document) or a FinCEN identifier.
The law defines a reporting company as:
“a corporation, limited liability company or other similar entity that is created by the filing of a document with a secretary of state or similar office under the law of a state, or formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a state.”
Beneficial owners are defined as:
“an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”
Although the CTA’s obligations should not be too time-consuming for your business, this is a report you absolutely must file, and the information must be correct. Remember that FinCen is always working behind the scenes to detect possible money laundering. Any incorrect information on the report can cause FinCen to investigate further.
How to Make Filings Under the CTA
FinCen maintains an electronic database of required filings. You must go onto the Fincen website to make your required filings. Not only do you have to fill out the electronic form, but you may also need to upload supporting documentation, such as copies of identification.
Before you make any filings to FinCen, you must take time to prepare and make sure you get it right. Although penalties are for willful non-compliance with the law, you do not want to open yourself up to action from the regulator when you have failed to make correct filings.
Who Has Access to CTA Filings
The information you submit as part of your CTA report may be used by several entities, all intending to prevent money laundering or financing of illegal activities. Of course, federal government law enforcement will have access to CTA information. Numerous agencies can now review reports as compliance with the law takes hold.
Starting in the spring of 2025, financial institutions will also have access to CTA reports. Under federal law, these institutions have an obligation to identify their customers and the sources of funds. These banks can use the information provided in the report as part of their customer due diligence requirements to know exactly with whom they are doing business. This will help them meet anti-money laundering requirements moving forward.
Exceptions from the CTA
The CTA does not apply to every single business or beneficial owner of one. Some businesses are not required to report information to FinCen, while companies may not need to report information about certain beneficial owners.
The CTA applies primarily to small businesses. If your business is bigger than a certain size, you will not need to complete the filing under the law. For example, you will be exempt from reporting under the CTA if the following apply:
- You have more than twenty full-time workers employed in the United States.
- Your business has an operating presence at a physical location in the United States.
- You have filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales.
In addition, you do not have to report if your business is an inactive entity prior to January 1, 2020, and some other conditions apply. In total, there are 23 different exceptions to the CTA, and a corporate lawyer can review your individual business to determine whether one applies to you.
There are also certain owners about whom you do not need to report information. For example, if a minor under the age of 18 owns part of the company, they do not need to appear on the report. You should consult a corporate lawyer to learn how the exceptions apply to your company’s reporting requirements, and which owners might be exempt.
The Deadlines for Complying with the CTA
The CTA was passed three years ago and went into effect on January 1, 2024. It gave businesses some time to phase in their compliance with the law. If you have not already made your required filings with FinCen, you are running out of time to do so.
The law gave existing businesses one year to comply with the CTA. In other words, you need to make your required report by January 1, 2025, or you can begin to face consequences for the failure. FinCen is known as an aggressive regulator in their pursuit and punishment of illegal activities.
If you are creating a new business, you have 90 days from the time you received actual or public notice the company’s creation or registration is effective. This is something a business attorney can advise on while working with you to get your company off the ground. Your CTA report should be part of your initial paperwork, including what you may file with the IRS and any state governance offices.
There Are Ongoing Compliance Obligations Under the CTA
The CTA imposes ongoing reporting requirements for your business. Even though the initial filing is a one-time report, you have an obligation to update your filing with FinCen in the future under certain circumstances.
You must notify FinCen whenever any of the following occur:
- There is a change to beneficial ownership in the company
- The company’s basic information has changed
- Your status as a reporting company has changed (for example, you have become eligible for an exemption that does not require you to report anymore)
Beneficial ownership in a small business can change at any time. For example, you might sell a part of your company or take on a partner who now has an equity interest. Reporting to FinCen is now another step on the list you must complete when the ownership in your company changes.
What Are the Penalties for Failing to Follow the CTA?
The CTA can mean that you may face both criminal and civil penalties for failing to strictly follow the requirements of the law. If you have willfully failed to make the required reports with FinCen, you can face a fine of up to $500 for each day that you failed to follow the law. Since the law involves protections against money laundering, you may even face up to two years in prison if you willfully fail to follow the law. You may also face criminal and civil penalties if you willfully cause a reporting company to not make the required filings. Thus, individual employees of your company can potentially go to jail for not following the law. Of course, what constitutes a “willful” violation of the law can depend on the facts and circumstances. However, deliberately failing to keep yourself informed of your regulatory requirements can open you and your business up to potential liability.
Seek Professional Help With CTA Compliance?
The CTA is a new law, and there are serious penalties for non-compliance with the statute. It may take your business some time to figure out the new regulatory requirements and what you need to do to follow the law. In addition, there are ongoing compliance requirements even after you have made your initial report under the CTA.
There are numerous areas where regulators must fill in the rules under the statute. Federal agencies have promulgated numerous regulations for how the CTA will work in practice. You need to stay abreast of any federal regulatory developments because they will affect the steps you take to follow the law. A corporate lawyer can explain the law to you and how your business can implement it. They can also keep you informed about any changes or new regulations you need to be aware of to comply with the CTA.
If you have not yet complied with the CTA or have any questions about the law, get help from a corporate attorney today. Your attorney can explain the law to you and inform you of how regulations and interpretations can affect you.
Consult a Washington Business Attorney Near You
FinCen allows companies to get the help from a third party to report the required information. A corporate lawyer can:
- Assess whether the Corporate Transparency Act filing requirements apply to owners of your business
- Gather all the necessary information from all beneficial owners
- File the actual CTA report by the deadline or review your filing before you do
Time is running short to comply with these CTA filing requirements. Many business owners are just now realizing they must comply with the law and are scrambling to get their filings together. You can ease this stress by contacting a business lawyer who can handle the process for you.
