We are writing to inform you that the Corporate Transparency Act (“CTA”) will become effective on January 1, 2024, for all new entities (as defined below) filed on or after the beginning of next year and will become effective on January 1, 2025, for all currently existing entities, (with entities being defined as any entity created or registered by the filing of a document with the secretary of state or similar office of a state) unless otherwise exempt by the CTA or its regulations. This new Federal law will require disclosing information about all corporations, limited liability companies and limited partnerships (unless they are otherwise exempt) and the disclosure of personal information about their beneficial owners and the persons who form those entities.
This new law aims to assist the government in prosecuting cases involving tax fraud, money laundering, terrorism and drug trade. A “beneficial owner” is any individual who directly or indirectly either (a) exercises substantial control over the company, or (b) owns or controls at least 25% of the ownership interests of the company. The CTA considers members of the board of directors or board of managers and the Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer and General Counsel as parties that qualify for mandatory disclosure under standard (a) above. If any information required to be reported changes, the company must file an updated report within 30 days. A change in the officers or directors of a company is considered such a change and would require an updated filing.
The CTA contains 23 exemptions from disclosure. Most apply to entities already subject to heavy government regulation, such as publicly traded entities, banks, insurance companies, securities broker dealers, etc. The one that might be the most useful for smaller companies is the “Large Operating Company” exception. Large operating companies are defined as any entity that (1) employs more than 20 full-time employees in the United States (determined on an entity basis), (2) has an operating presence at a physical office in the United States, and (3) filed a U.S. federal income tax return for the previous year showing more than $5,000,000 in gross receipts or sales. Other than the above, most smaller companies, which include condominium and homeowner associations, would not be exempt.
Failure to report as required or provide false or fraudulent information can result in civil fines of up to $500 per day for any violation and criminal penalties of up to $10,000 per day and two years of prison time.
It is incumbent upon you to familiarize yourself with this new law and determine whether your entities are exempt or required to file. As always, we are here to assist you.