What is the Corporate Transparency Act and what does it mean for my company?

Takeaway: As of January 1, 2024, startups are now required to comply with the Corporate Transparency Act by accurately reporting detailed personal information of their founders and investors. This is a major regulatory shift that founders need to take a hands-on approach to.

As of January 1, 2024, the Corporate Transparency Act (CTA) ushered in a transformative era in the United States, demanding unprecedented levels of transparency from entities formed or registered to do business across the nation. This landmark legislation, part of the broader Anti-Money Laundering Act of 2020, represents the most significant shift in U.S. anti-money laundering and counter-terrorism financing (AML/CTF) policy in over two decades. It aims to address the longstanding challenge of corporate anonymity, which has facilitated illicit activities ranging from money laundering to financing terrorism and evading sanctions.

Who is Affected?

The CTA applies to a wide array of U.S. entities, including corporations, limited liability companies (LLCs), and similar entities, requiring them to report detailed information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The CTA's definition of beneficial ownership is broad, encompassing individuals with substantial control over or owning significant interests in reporting companies. This includes senior officers, those with the power to make significant decisions, and those owning at least 25% of the entity's ownership interests.

The CTA provides for 23 exemptions, targeting entities that are already subject to regulatory scrutiny or that present a low risk of being used for illicit purposes, such as publicly traded companies, banks, and insurance companies.

What Does the CTA Mean for Startups?

The CTA mandates that most entities, unless exempt, report significant details about their owners, officers, and control persons to FinCEN. These reports must include information such as the legal name, business address, jurisdiction of formation, and Tax Identification Number (TIN) of the entity, alongside detailed personal information of the founders and investors, including the beneficial owner's name, address, date of birth, and an identification number, such as a driver's license or passport number. The process of identifying your “beneficial owners” and reporting the required information can be longer and more complicated than it may seem on the surface.

Compliance Deadlines

  • New Entities: Companies formed or registered after January 1, 2024, must file their initial beneficial ownership information within 30 days of formation or registration.

  • Existing Entities: Companies in existence before January 1, 2024, must file their initial reports by January 1, 2025.

  • Updates: Any changes in beneficial ownership information must be reported within 30 days.

Practical Steps for Startups

Startups must navigate these new requirements with careful planning and consideration. Developing a comprehensive CTA compliance policy, evaluating opportunities for reporting efficiencies, and inventorying existing entities for compliance are crucial steps.

  • Identify Beneficial Owners: Clearly identify who qualifies as a beneficial owner under the CTA. This includes understanding direct and indirect ownership and control structures within the company.

  • Implement Record-Keeping Practices: Develop robust internal systems for tracking beneficial ownership information. This includes ensuring that any changes in ownership or control are promptly recorded and reported and utilizing FinCEN IDs where possible to streamline reporting processes and mitigate risks associated with maintaining up-to-date information on beneficial owners.

  • Engage Legal and Compliance Experts: Consult with legal professionals who specialize in corporate compliance to navigate the complexities of the CTA. This can help ensure that all reporting is accurate and timely, mitigating the risk of penalties.

Conclusion

In conclusion, the Corporate Transparency Act (CTA) represents a pivotal development in U.S. regulatory policy, demanding unprecedented transparency from businesses to combat illicit financial activities. For startups, navigating the complexities of the CTA is essential to avoid severe penalties and ensure legal compliance. It will likely take longer than expected to collect the requisite information and complete a company’s CTA filing, so we encourage startups to engage their legal counsel and get started early.