Editorial: Corporate Transparency Act Poses Challenge for Businesses

​The Corporate Transparency Act (CTA), enacted in 2021 and effective from January 1, 2024, is a federal law that aims to combat illicit activities such as money laundering, terrorism financing, tax fraud, and other misconduct through business entities. It does so by requiring certain U.S. businesses to report information about their beneficial owners and controlling persons.

Under the CTA, entities deemed to be “Reporting Companies” are required to report.  A “Reporting Company” under the CTA is defined as any company that is created by filing a document with a governmental agency (including a federally recognized Indian Tribe), such as a corporation, a limited liability company, or a limited partnership; or a foreign-formed entity that is registered or registers to do business in the United States. Not all entities are considered “Reporting Companies”. The CTA generally applies to smaller and medium-sized legal entities, including shell companies. These are entities that:

• Are not subject to supervision by other regulatory agencies (e.g., entities regulated by the Securities and Exchange Commission and Commodity Futures Trading Commission, or organizations that are tax-exempt under the Internal Revenue Code).
• Employ fewer than twenty-one full-time employees and generate less than $5 million in annual U.S. revenue.

Reporting companies are required to provide the following information about beneficial owners and controlling persons: their names, addresses, birthdays, and identification numbers (such as a license or passport number), and the jurisdiction of the documents.

The penalties for not complying with the CTA are quite severe. They include both civil and criminal penalties:

• Civil Penalties: If a reporting company fails to comply with the CTA, it can be fined up to $500 per day for each day the violation continues.​
• Criminal Penalties: In addition to civil penalties, there are also criminal penalties for failing to comply with the CTA’s requirements. Non-compliant entities can face a prison term of up to two years and/or a fine of up to $10,000.

These penalties underscore the importance of compliance with the CTA’s reporting requirements. If you’re unsure how to comply with the CTA, it’s recommended to seek guidance from a business advisor or legal professional.

The impact of the CTA on small businesses across the United States is significant. It imposes broad ownership disclosure obligations on any entity formed or doing business in the United States.

Recently, a federal judge in the U.S. District Court for the Northern District of Alabama held the CTA to be unconstitutional as a matter of law on March 1, 2024. This case will undoubtedly be appealed.  As a result, the CTA remains in full effect except as to members of the National Small Business Association (NSBA) and possibly reporting companies in the Northern District of Alabama.
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Stay tuned for more information.

Reference:  Business Law Today , US Chamber of Commerce

Author

Matt Murphy, TCRCC Government and Regional Affairs Director, ​[email protected]