The recently passed (at the beginning of 2021) Corporate Transparency Act (also known as the CTA) requires all entities formed or registered in the United States to report any beneficial ownership information. In addition, they must report to the Financial Crimes Enforcement Network before January 1, 2022.
The goal of the CTA was to make it more difficult for those anonymous shell companies we hear about to operate. Those shell companies were primarily used to help individuals and organizations evade paying taxes or managing a criminal organization.
This also means that small businesses will have to collect and report information about their ownership for the first time in history. Therefore, it is essential to understand the requirements and who qualifies to register under this new act.
Application
The scope of the CTA is quite broad. It requires limited liability companies, corporations, or any similar entity formed or registered to do business in the United States to meet the requirements of the new act.
That said, there are exemptions. For example, publicly-traded or already heavily regulated companies would be exempt. That means major financial services institutions, banking, accounting, and investment firms already report to government agencies such as the SEC or companies with more than $5 million in revenue or 20 full-time employees.
Finally, any charities or churches, really any non-profit organization, would be exempt from the CTA reporting.
Requirements of Reporting
If you have a small business that falls under the reporting guidelines, you may be wondering what requirements there are for reporting. It means collecting all of the relevant information – date of birth, address, name, identifying number, and so on – for any of the beneficial owners of the organization.
While there is something of a lack of clarity as to how these companies will report, it is believed that each state will take on the task of collecting the data that is now required under the CTA. With January 1, 2022, deadline on the horizon, these companies should have either reported their information or be in the process of doing so.
Potential Impact
What impact will this have on small businesses everywhere? For starters, handle the process effectively. That means beginning to gather the necessary information, reviewing any governance documents to confirm whether any obligations will conflict with those CTA requirements, revising governance documents that require the disclosure of information from owners, and those working with advisors or managers to install a process for meeting those requirements.
Having the proper help means adhering to these guidelines and ensuring that all the requirements are met. There are potential penalties for failing to report as well. Any information deemed fraudulent, or is late or unsubmitted, will be a violation in the eyes of the CTA.
This means a civil penalty of as much as $500 every day that the violation continues. It can also include criminal fines ranging from $10,000 to two years in prison. In addition, any unauthorized disclosure of this information by a third-party recipient or government employee shall also face punishment. They may be subject to $250,000 in fines and up to five years of imprisonment.
The Goal
The goal is to make it much more difficult for these tax-evading shell companies to pop up seemingly overnight. For most small businesses, the reporting process is fairly straightforward. However, unless you fall under one of the exemptions, it is essential to ensure that this information is reported on time.
