Starting a New Business Gets a Little More Complicated

New regulations within the Corporate Transparency Act (CTA) are having a significant impact on future ownership of a business entity, as well as an existing business entity, that may result in heavy fines and penalties if found to be non-compliant. Every business should be thinking about how the CTA affects their business and what they need to know if they are considering forming a new entity in the coming year.

On January 1st, 2021, the National Defense Authorization Act (NDAA) for Fiscal Year 2021 was enacted into law. Simply put, the NDAA establishes or maintains defense programs, policies, projects, or other authorized activities at Department of Defense (DOD) and other federal agencies and provides guidance on how the appropriated funds are to be used in carrying out those activities. Embedded in this piece of legislature is the Corporate Transparency Act (CTA) which significantly expands the “beneficial ownership” disclosure requirements for U.S. entities.

In sum, the CTA is designed to identify high risk businesses that, for the purposes of this legislation, can be characterized as businesses that criminals and certain foreign officials use to hide and move corrupt proceeds and other illicit financing to carry out illegal activities, ranging from tax evasion to money laundering to carrying out terrorist plots. 

CTA Reporting Requirements

The CTA requires businesses to submit a “beneficial ownership” registry to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Under the CTA, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

• Exercises substantial control over an entity; or
• Owns or controls at least 25% of the ownership interests in an entity.

There are five exceptions from the term “beneficial owner”:

• A minor child, if the child’s parent’s or guardian’s information is otherwise is reported properly.
• An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual.
• An individual acting as an employee whose control is derived solely because of employment status.
• An individual whose only interest in the entity is through a right of inheritance
• A creditor of the entity unless the creditor meets the requirements of a beneficial owner.

The FinCEN registries will contain vital information related to each qualified beneficial owner of the business, including, but not limited to, a full legal name, date of birth, current residence or business address, and a person’s unique identifying number.

How does this affect my business?

The CTA will impose new burdens on many entities operating in the U.S and is likely to have significant implications for foreign and domestic businesses.

The deadline for compliance varies based on the status of your business. Companies established after the FinCen regulations are in effect, will report the required information at the time of company formation. An existing entity will be given two years after the effective date of the regulations to report the required information. The effective date of the regulations does not begin until January 2022, which is the deadline for Congress to enact the regulations.

The potential penalties associated with non-compliance could be up to $10,000 in civil fines, additional fines under title 18 of the U.S. code and up to three years of imprisonment.

It is imperative that all companies take immediate steps to familiarize themselves with the Corporate Transparency Act, determine if they are subjected to the CTA, and begin collection of information to ensure proper compliance, especially if you considering formulation a new entity in the upcoming year. In order to avoid this, please reach out to your tax professional or a tax professional at Citrin Cooperman for any questions. The author, Jared Lerch, can be contacted directly at jlerch@citrincooperman.com.