A groundbreaking new federal law, the Corporate Transparency Act, designed to combat money laundering and other nefarious activity conducted via shell companies, went into effect Jan. 1.

Even if laundering money has never crossed your mind, you should pay close attention to its requirements because the broad sweep of the law, known by the shorthand “CTA,” may include you or your company.

The CTA represents a significant change in how the U.S. government monitors the ownership and control of U.S. companies, imposing reporting requirements on millions of smaller entities while exempting many larger organizations.  Those entities required to report – known in CTA-speak as “reporting companies” –must provide information regarding who ultimately controls the company – its so-called “beneficial owners” – to the U.S. Treasury Department.

Any analysis of whether the CTA imposes reporting requirements on your (or your client’s) company begins with determining whether it is a reporting company or qualifies for an exemption.  If you are a reporting company and are not exempt, the CTA requires you to file a “beneficial interest ownership report.”

Who are Reporting Companies?

The CTA’s definition of reporting companies is quite broad and includes domestic and foreign corporations, LLCs, LLPs, limited partnerships and other entities required to be registered with a state’s secretary of state.

Real estate investors and developers who use LLCs or LPs to manage ownership of a project should take particular note. Many joint ventures, syndications and single-purpose entities created for real estate deals, except for some subsidiaries that are 100 percent owned and controlled by an exempt entity, will need to report. A company would be wise to review each single-purpose entity on a case-by-case basis to determine if an exemption applies.

The CTA provides numerous exemptions from these reporting requirements. These “exempt entities” include:

• “Large operating companies” – e.g., companies that employ more than 20 full-time employees in the U.S., filed federal tax returns in the prior year reporting more than U.S. $5 million in gross receipts, and have a physical office in the U.S.; and
• Companies with separate government reporting requirements, such as publicly-traded companies, banks, financial service institutions, insurance companies, tax-exempt entities, etc.

A beneficial owner is an individual who, directly or indirectly, either exercises “substantial control” over the entity or owns or controls at least 25 percent of the entity’s equity. Minor children and persons acting as a nominee, custodian or agent on behalf of another are not considered beneficial owners.

The CTA defines those who exercise “substantial control” as a company’s senior officers, other individuals who can appoint or remove senior officers or directors and those who otherwise have substantial influence over important company decisions.

What Has to be Reported?

A reporting company must disclose each beneficial owner’s name, birthdate and home address, and provide an image of his or her driver’s license, passport or other government-approved document.

The company must also provide its address, state of registration and federal identification number. Additionally, for reporting companies formed after Jan. 1, 2024, similar information is required from the person in charge of filing the beneficial interest ownership report.

Information in the reports is generally not publicly available. It can be disclosed only to law enforcement agencies in specified circumstances or, with the company’s consent, to financial institutions in connection with their know-your-customer obligations.

Filing is done electronically through Treasury’s beneficial interest ownership report secure e-filing portal. Companies may use their accountants, law firm or a third-party service provider to file the reports on their behalf.  There is no filing fee.

When to Report?

Reporting companies formed before Jan.1, 2024, have until Jan. 1, 2025, to file their initial beneficial interest ownership report. Companies registered after Jan. 1, 2024, must file their initial report within 90 days of registration.

After the initial filing, there is no annual or quarterly filing requirement; however, reporting companies must update or correct their report after beneficial ownership changes or incorrect information is discovered.

Real estate development companies, in particular, where ownership percentages and structures often change during the life cycle of a real estate asset, should develop a system to monitor these changes so as to ensure compliance.

At this point, you may be asking if there are penalties for violating the CTA.

You bet! Any person who willfully provides false information or fails to comply with CTA reporting requirements is liable for civil penalties of up to U.S. $500 for each day the violation continues. Violators are also subject to criminal penalties of imprisonment of up to two years and fines of up to U.S. $10,000.

Because the CTA is so new and guidance is frequently updated by the Treasury Department, companies should stay in touch with their advisors on these issues.

Thomas D. Herman is a corporate attorney and partner at Smith Duggan Cornell & Gollub LLP in Boston. He can be reached at therman@smithduggan.com