CTA Info

NOTICE REGARDING THE CORPORATE TRANSPARENCY ACT

The Corporate Transparency Act (“CTA”), a new federal law, became effective January 1, 2024.  The CTA creates filing requirements for many business entities (corporations, LLCs, partnerships and certain trusts). Failure to comply with such requirements may result in criminal or civil penalties.

The CTA was enacted as part of the Anti- Money Laundering Act of 2020 to aid in preventing and stopping illegal activities such as money laundering, fraud and terrorist financing activities. The CTA requires the disclosure and reporting to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) of certain ownership information of legal entities.

Businesses subject to the CTA reporting requirements (“Reporting Companies”) are those set up as a corporation, limited liability company, limited partnership, certain types of business trusts, and a few unusual other types of entities. General partnerships and sole proprietorships are not subject to CTA reporting requirements. Trusts, other than registered business trusts are not subject to CTA reporting requirements.

Note that smaller businesses are the focus of the CTA. Thus, a business that meets all three of the following criteria will not be required to file a CTA Report:

  • the business reported over $5 Million in gross receipts on its last filed U.S. Tax return;
  • the business has more than twenty full-time employees in the U.S.; and
  • the business has an operating presence at a physical office in the U.S.

CTA reports (“CTA Reports”) will be filed electronically with the FinCEN. These reports are also being referenced as “beneficial ownership information” (BOI) reports. There is no filing fee required by FinCEN for filing a CTA Report, or for filing any amended CTA Report when an updated report is needed. The initial CTA report for companies existing on December 31, 2023, is required to be filed with FinCEN on or before January 1, 2025. Mullen & Henzell L.L.P. is not making this filing on your behalf unless we have communicated personally with you that we are handling this for you.

Each Reporting Company will be required to file a new CTA Report when information in the prior report becomes out of date. The amended CTA Report must be filed within thirty days of the date upon which the prior CTA Report became inaccurate. A booklet published by FinCEN with extensive information and guidance for Reporting Companies can be accessed at: Small Entity Compliance Guide | FinCEN.gov. Additional “frequently asked question” information is available from FinCen at www.fincen.gov/boi-faqs.

In addition to specified information about the Reporting Company, the CTA Report must include all information specified with respect to its beneficial owners. Beneficial owners are those who own more than 25% of the equity of the Reporting Company, as well as those in substantial control. More detailed information on this follows in the CTA Summary Fact Sheet.

Please note that if your company is required to file a CTA Report and you fail to comply there are potentially significant penalties that may be assessed, including fines and criminal penalties. Thus, we strongly encourage you to designate a trusted person to review this Notice and the information linked at FinCen.gov, and be prepared to file the CTA Report prior to the filing deadline of January 1, 2025. That person will be your company’s CTA Reporting Officer.

Here is a link for your CTA Reporting Officer to prepare the filing yourself without third party or attorney assistance:

Beneficial Ownership Information Reporting | FinCEN.gov

Note that various companies are providing assistance with the filing requirements. It is possible to make the filings needed without such assistance (see the link above), but if you do desire assistance, two companies we work with regularly are Parasec and CSC. Their website information is as follows:

Parasec: Beneficial Ownership Information Filings – We Make Things Easier – Parasec

CSC: Corporate Transparency Act | CSC (cscglobal.com)

They may be able to assist you. Note that Mullen & Henzell L.L.P. is not affiliated with these companies and receives no referral or cost sharing fee but has had a long history of working with them in completing government filings.

Also, of course, do not hesitate to contact the attorney you regularly work with at Mullen & Henzell L.L.P. if you have questions or need assistance in preparing the initial filing or find you need to amend a filing in the future. If you do not have a regular attorney assisting you, please contact CTAinfo@MullenLaw.com.

 

CTA SUMMARY FACT SHEET

Law

The Corporate Transparency Act (“CTA”), a new federal filing requirement for many business entities, will be effective on January 1, 2024. The CTA was enacted as part of the Anti- Money Laundering Act of 2020. “Reporting Companies” formed on or after January 1, 2024, will be required to file a report with the Financial Crimes Enforcement Network (“FinCen”), a division of the United States Department of Treasury, within ninety (90) days of formation. The report must provide information about the company and personal information about those in substantial control of the Reporting Company, which control derives from (a) ownership interests and/or (b) the right or ability to exercise substantial control through official positions (management) or contractual or other arrangements.

 Access to Database

Pursuant to the CTA, the information in reports will not be available to the general public, but it will be available to virtually all federal and state law enforcement agencies.

Reporting Company

Except as noted under “Exempt Companies” below, a Reporting Company is (a) any company that is created by filing a document with the Secretary of State, or a similar office in any state, territory or federally recognized Indian Tribe, or (b) is a foreign-formed entity that is registered to do business in the United States. This includes corporations, limited liability companies, limited partnerships, and certain business trusts.

Timing of Reporting

Reporting Companies existing on December 31, 2023, will be required to comply with the reporting requirements of the CTA on or after January 1, 2024 and before January 1, 2025.

A Reporting Company formed on or after January 1, 2024 also will be required to file personal information for up to two individuals, that are known as “Company Applicants”. No Company Applicant information is required to be filed for Reporting Companies existing on or before December 31, 2023.

Exempt Companies

Sole proprietorships and general partnerships are not currently within the definition of a Reporting Company because they are not formed by filing a document with a governmental agency. Publicly traded companies, tax exempt nonprofit organizations, trusts (other than registered business trusts), banks, and certain other companies are also exempt per the terms of the CTA.

Business entities that are neither publicly-traded nor qualify as a regulated exempt entity, will be exempt from the CTA reporting requirements if they meet all three of the following requirements.

  1. The entity has more than 20 full-time employees in the United States;
  2. The entity filed, in the previous year, a federal tax return reporting more than $5 million in gross receipts; and
  3. an operating physical location in the United States.

Because a newly formed entity will be unable to satisfy the requirement in (b) above, at least initially, it will be a Reporting Company, notwithstanding its revenues or its number of employees.

Holding companies of business entities meeting the three-prong test above which do not have their own employees will not qualify for an exemption. Companies directly or indirectly owning real estate, without employees, likely will be Reporting Companies.

Beneficial Owner

The general rule is that a Beneficial Owner is any individual who (i) directly or indirectly exercises Substantial Control over the Reporting Company or who owns or controls not less than 25% of the ownership interests of the Reporting Company. Unfortunately, to fully understand this general rule one must know what the CTA deems to be “Substantial Control” and how someone may be deemed a 25% owner, even without a substantial ownership interest.

“Substantial Control” is defined expansively.  For more information please review FinCen’s Small Entity Compliance Guide | FinCEN.gov. Officers (president, secretary, treasurer), directors, managers of LLC and general partners of partnerships should all be listed.  Generally, our recommendation is to disclose broadly.  We realize this is complex and we are available to assist you in reviewing your particular situation.

The second element, “percent of ownership,” may also be complicated in some situations. A 25% equity ownership may be difficult to determine when there are varying classes of stock or member or partner capital or income interests. If the shares or interests are held in a trust, the sole beneficiary of the trust and the trustees, as well as any other persons exercising control, will likely be considered Reporting Persons. A member of an LLC with a 10% interest as to distributions, but a 30% capital interest, will likely be a Reporting Person. A shareholder whose stock has preference rights may be deemed to own more than 25% of the equity by virtue of liquidation preferences conferred by the preferred stock.  Because potential penalties (see below) may be significant, and for most people reporting as a Beneficial Owner will not have any consequences, it would be prudent to err on the side of reporting as a Reporting Person in cases that are difficult to resolve with certainty.

Filing Party; Future Filings

The primary obligation to file the Report under the CTA with FinCEN is the entity itself. Filings can be made by third parties on behalf of an entity or can be made by an entity (through their CTA Reporting Officer, which is the person that the entity designates to handle the filings needed). Here is a link to make the filing directly with FinCEN:

Beneficial Ownership Information Reporting | FinCEN.gov

After an initial filing no annual update filings are required until the information in a Reporting Company’s filed report becomes outdated.  Then the Reporting Company is required to file an updated report. More information on this further filing and timing is provided in the Small Entity Compliance Guide | FinCEN.gov .

Company Applicants

Company Applicants are the persons (individuals) making a filing for a Reporting Company.  There can be up to two individuals who file or cause the filing of the document that creates the Reporting Company. For purposes of the two-person limit, the Company Applicants would be the person who files the formation document, plus the person most responsible for directing the formation of the company.

NOTE: THE FOREGOING IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO BE A COMPREHENSIVE SUMMARY OF THE CTA NOR FULLY SET FORTH FILING REQUIREMENTS, FILING STANDARDS OR PROCESSES OR PENALTIES. PLEASE REFER TO THE INFORMATION PROVIDED BY FINCEN OR CONSULT WITH LEGAL COUNSEL ABOUT YOUR SPECIFIC SITUATION.