You may or may not have heard of the Corporate Transparency Act (CTA), a component of the Anti-Money Laundering Act of 2020, which takes effect January 1, 2024. This law is, at its heart, an anti-crime law intended to combat money laundering, terrorism financing, tax fraud, human trafficking, and other illicit activities. However, it will affect a broad range of individuals and companies who own or manage businesses and/or invest in real estate.
The goal of the CTA is preventing bad actors (criminals) from utilizing complex corporate structures and shell companies to hide their identities and move money through the U.S. financial system. Although most of you reading this article are not bad actors hiding your identities or laundering money, you might be surprised to discover that you and the companies you manage and/or invest in may soon have increased reporting requirements to the U.S. Department of Treasury because of the CTA’s reach.
Essentially, if a company is a “reporting company” it must disclose the identity of its “beneficial owners” in an annual report. It is beyond the scope of this short article to discuss all the nuances and still unknown definitions around the exemptions and inclusions in the definitions of “reporting company” and “beneficial owners”, but a quick review proves that the CTA is intended to cast a broad net around entities which typically have few, if any, other reporting requirements. Entities required to report are generally corporations, limited liability companies, or other entities typically defined with a filing requirement with the Secretary of State. Some examples of exceptions for a “reporting company” include:
- publicly traded companies;
- banks;
- certain tax-exempt entities; and
- “large operating companies” (more than 20 employees, physical presence in U.S. and more than $5 million in annual gross receipts from U.S. sources).
A “beneficial owner” is someone who exercises “substantial control” over the entity or owns OR controls at least 25% of the ownership interests of the entity. This can include larger passive investors in real estate or other companies, plus officers and executives who exercise substantial control without being an owner. The regulations describe at length the various inclusions and exceptions in defining both “substantial control” and “ownership interests” which can be quite complicated.
If you are an individual who exercises substantial control or someone who owns more than 25% of an entity in the United States – and the entity is not excluded under one of the exceptions – you should review the CTA and discuss with your attorney and/or accountant what your reporting requirements may be.
