Investors with business entities have had the flexibility to maintain their privacy about the ownership and control of LLCs, LPS, and corporations. However, the Final Rule under the Corporate Transparency Act (CTA) changes these obligations significantly. This is by divulging previously private information concerning the ownership and control of various business entities. This blog will discuss what the CTA is and how the CTA will impact small businesses.
Enacted on January 1, 2021, by congress, this new anti-money laundering legislation imposes extensive reporting requirements for beneficial owners of most entities. The Act aims to provide significant transparency of legal entities to pinpoint and tackle illegal activities. These include money laundering, terrorism financing, and related illicit activities.
Understanding the Financial Industry Regulatory Authority (FINRA)
With the new legislation scheduled to take effect on January 1, 2024, several organizations authorized by the US government will adjoin to enforce this new legislation. The Financial Industry Regulatory Authority (FINRA) is among the top private organizations to help implement CTA. This self-regulatory organization focuses on imposing ethical investment practices between registered brokers, primarily regulating and registering brokers and brokerage enterprises.
In addition, FINRA ensures the Securities and Exchange Commission (SEC) regulates various aspects of the securities business. From creating rules for brokers to evaluating firms’ compliance and disciplining brokers abusing these rules. Brokers and brokerage companies can also source crucial educational resources from FINRA.
Who Must Report Under the CTA Final Rule?
The Corporate Transparency Act defines a reporting company as an organization, limited liability company, or related entity formed or registered in a US state. The legislation defines two types of reporting companies:
- Domestic reporting company: It involves an entity created through filing a document with a state secretary or other similar office under state law or the American Indian tribe (i.e., corporations and LLCs).
- Foreign reporting company: This includes an entity formed under the laws of a foreign country and registered to operate in a US state or tribal jurisdiction through filing a document with a state secretary or other similar office under state law or American Indian tribe.
However, the Act exempts twenty-three different entity categories from the reporting company definition. Most exempted entities are subject to state or federal regulations, mandated to disclose beneficial ownership information like banks, depository institutions, security brokers and dealers, and credit unions. Most small businesses will not fall under these exemptions.
Who Are Beneficial Owners?
The Act defines beneficial owners as individuals who exercise significant control over a reporting company or own at least twenty-five percent (25%) of the ownership interests. Significant control of beneficial owners includes those serving as senior officers in a reporting organization, having the authority to appoint or sack senior officers or most board members, having the ability to influence critical decisions, or any other form of substantial control.
With a few exceptions to who qualifies as a beneficial owner, the Act exempts minors, nominees, future inheritors, creditors, and employees as beneficial owners. Once the Rule takes effect on January 1, 2024, reporting companies will report beneficial owners to FinCEN. They need to provide their full legal names, date of birth, current residential or business street addresses, and identification numbers from acceptable documents.
- Companies formed before January 1, 2024, will have until January 1, 2025, to submit the beneficial ownership information.
- Companies established between January 1, 2024, and December 31, 2024, will have 90 days to submit that information.
- Companies established after January 1, 2025, will have 30 days to report beneficial ownership information.
How Will CTA Affect Small Businesses?
The Corporate Transparency Act will impact nearly 32 million business entities in the US. It will require them to report beneficial ownership information with FinCEN. However, these new reporting requirements continue to raise privacy concerns, which the CTA has cleared through data protection restrictions. While penalties for failing to report are steep for those who violate these protections, qualifying entities must submit the necessary beneficial ownership information completely and correctly.
In most cases, business entities will have to collect the required details from beneficial owners before reporting deadline. In addition, FinCEN provides an opportunity to update and make corrections in case of any mistakes. All these practices will require small companies to incorporate beneficial ownership information collection into their everyday operations. Besides, keeping track of reporting and update deadlines can be burdensome, including conducting further due diligence, representation, and warranties specified for a target entity’s CTA reporting.
Get Help With the Corporate Transparency Act Reporting
The Corporate Transparency Act presents a substantial update to the US anti-money laundering regulations. At Brown & Blaier, PC, we can help you get more insights into the Corporate Transparency Act and prepare you for reporting. Contact us to learn more or find out more about this new legislation.