Starting January 1, 2024, millions of small businesses that form after that date will be required to report identifying information about their beneficial owners and company applicants to the federal government under the Corporate Transparency Act (CTA). The following year, businesses that formed before January 1, 2024, will also be required to meet the CTA’s reporting requirements. 

Understanding the CTA and its requirements is essential to keep clients with business entities informed and prepared and to help them avoid penalties. It is also important to protect your firm from malpractice exposure. Keep reading to learn about the CTA and its requirements.

Understanding the Corporate Transparency Act

Congress passed the CTA in 2021 as part of the National Defense Authorization Act to  advance the government’s battle against money laundering, tax fraud, and the financing of terrorism. In the fall of 2022, the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Final Rule to implement the CTA. This rule clarifies the CTA’s reporting requirements and timelines. Accordingly, attorneys must become familiar with the CTA and Final Rule and send notices to clients who have formed a business entity or who may have an entity as part of their estate plan to let them know when and how those entities must report and update required information.

Reporting Requirements for Clients

The reporting requirements take effect January 1, 2024, for the estimated 2 million new businesses that will be formed in 2024. The following year, an estimated 30 million existing businesses will be affected by the rules. Entities that will be required to issue CTA reports include all businesses that meet the definition of a reporting company, including many corporations, limited liability companies, limited liability partnerships, and business trusts. Some of these types of business structures are often used for estate planning purposes. 

A reporting company must provide the required information for the following individuals or entities: 

• Beneficial owners (individuals or trusts that own or control at least a 25 percent interest or exercise substantial control over the company).
• Company applicants (generally, people who file the documents necessary to create new business entities or direct or control others who file those documents). The final rule does not require reporting companies that exist or register before January 1, 2024, to identify or provide information about company applicants. However, reporting companies created after January 1, 2024, must provide the required information for company applicants.

Reporting Details

Businesses that exist by January 1, 2024, will have an entire year to make their first CTA report. However, businesses created after January 1, 2024, will have only thirty days to file their initial report. From a planning standpoint, you can encourage clients to form their entities in 2023 to take advantage of the one-year period. 

A CTA report must include the address and tax identification number of the business entity, as well as the residential address of the owners and applicants. These reports must also provide the names, birthdates, and identification numbers of the owners and applicants. The penalties for failure to report can range from a $10,000 fine to two years in prison. FinCEN will receive CTA reports through a secure computer system.

If there is a change in the information previously reported, reporting companies will have thirty calendar days to file an updated report. The reporting company is not required to file an updated report with FinCEN upon the death of a beneficial owner, but an updated report removing the deceased beneficial owner and identifying any new beneficial owner is required when the beneficial owner’s estate is settled. Reporting companies created or registered after January 1, 2024, are not required to update information they provide about company applicants. 

Exemptions to the CTA

Like many federal laws, the CTA includes some exemptions, which primarily cover large companies that are already heavily regulated. Included among the twenty-three exemptions of the CTA are 

• banks, credit unions, and other financial institutions that already complete this type of reporting under other legislation;
• dormant or inactive entities; and
• companies with twenty or more employees or $5 million in annual revenue.

Your Next Move

The first thing you should do is notify clients with business entities about the CTA, its reporting requirements, and how it may affect them. Take care to not use language that inadvertently establishes a new attorney-client relationship. Next, revise your engagement letter to clarify that when you assist a client in forming an entity, the engagement does not extend to any ongoing obligations under the CTA unless a new engagement is established to assist with further reporting. Finally, you can learn much more about the CTA by watching our on-demand webinar presented by Gary L. Fletcher, Esq. Click here to watch the webinar.