Understanding the Corporate Transparency Act (CTA)

15 Nov 2022  / 

Understanding the Corporate Transparency Act (CTA)

On January 1, 2021, Congress enacted the Corporate Transparency Act (“CTA”) as part of the National Defense Authorization Act. The CTA was passed to eliminate anonymous shell companies in the United States for criminal or tax evasion purposes.

For the first time in history, there are now federal reporting requirements for small companies that will require the annual collection and reporting of ownership information.


What Entities Must Report to the Financial Crimes Enforcement Network (“FinCEN”)?

The CTA implements a reporting requirement for (i) all corporations, (ii) limited liability companies, or (iii) other similar entities created by the filing of a document with a secretary of state or similar office under the law of a state or formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a state. The definition is broad as to what is included in a reporting company because the Treasury has not fully clarified what a “similar entity” precisely includes.  

What Entities are Excluded from the Reporting Requirement of the CTA?

The definition of a “reporting company” is expansive; however, there is a list of twenty-three (23) excluded entities that do not need to report to FinCEN. It is essential to determine whether your entity is not on this list of excluded entities, thus applying reporting requirements. These excluded entities include:

  • securities issuers, domestic governmental authorities, banks;
  • domestic credit unions, depository institution holding companies;
  • money transmitting businesses, brokers, or dealers in securities;
  • securities exchange or clearing agencies, other Securities Exchange Act of 1934 entities;
  • registered investment companies and advisers, venture capital fund advisers;
  • insurance companies, state-licensed insurance producers;
  • Commodity Exchange Act registered entities, accounting firms, public utilities;
  • financial market utilities, pooled investment vehicles, tax-exempt entities;
  • entities assisting tax-exempt entities, large operating companies; and
  • subsidiaries of certain exempt entities and inactive businesses.

These entities are excluded from the reporting requirement primarily because they are already required to partake in substantial government reporting as a part of their creation. The Treasury may promulgate new regulations that exclude other types of entities in the future.  

What is a Beneficial Owner Under CTA?

Beneficial owners under the CTA are individuals who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interest of the entity. The CTA does not clarify what it means to exercise “substantial control” over an entity.  

Who is Not a Beneficial Owner Under CTA?

Under the CTA, some exclusions apply to the definition of a beneficial owner. These exclusions include:

  • Minor children (the parent or guardian of the child must report in this case);
  • Nominees, Intermediaries, Custodians, or agents acting on behalf of another individual;
  • Employees whose sole economic interest in the company is derived from the employment;
  • Individuals whose interest is through the right of inheritance; and
  • Creditors with no control or ownership of the company.


What Information and in what Form Must Beneficial Owners Report to FinCEN?

Under the CTA, all reporting companies must report to FinCEN each beneficial owner’s (i) full legal name, (ii) date of birth, (iii) current residential or business address, and (iv) a unique identifying number from an acceptable identification document; or a FinCEN identifier. If an individual beneficial owner holds an interest in an entity that directly or indirectly owns an interest in a reporting company, the reporting company may report the FinCEN identifier of the entity instead of the individual’s information.

Acceptable forms of identification include (i) nonexpired passport issued by the United States; (ii) nonexpired identification document issued by a state or local government to the individual acting for identification of that individual; (iii) nonexpired driver’s license issued by a state; or (iv) nonexpired passport issued by a foreign government if the individual does not have a document previously described.  

Why does FinCEN Require this Information?

The goal of the CTA is to create a database where all the information of beneficial owners is kept. The purpose of this database will be to aid in a government investigation of criminal activity that shell entities might shield. This database will help gather information about entities without tipping off the entity owner that they are under investigation by a governmental entity.  

What are the Penalties for Violation of the CTA?

There are severe consequences for not correctly reporting all the information required under the CTA to FinCEN. Any person who violates the CTA’s reporting requirements (i) is liable for a civil penalty of not more than $500.00 for each day that the violation continues or has not been remedied; and (ii) may be fined not more than $10,000.00, imprisoned for not more than two (2) years, or both. A person shall not be subject to such civil or criminal penalty if the person submits a report containing corrected information no later than ninety (90) days after the date on which the person submitted the report initially. The exemption is not available if, when the person submitted the original report, the person acted to evade the CTA’s reporting requirements and had actual knowledge that any information contained in the report was inaccurate.  

What is the Timeline for Reporting Beneficial Owners?

Reporting companies that are in existence before the effective date of the CTA, January 1, 2022, have one (1) year to file their initial report. Reporting companies that are created or registered after the effective date of the CTA have fourteen (14) days after their formation to file with FinCEN. Companies have thirty (30) days to edit their previously filed reports and fourteen (14) days to correct any information they know or should have known is inaccurate at the time of reporting.  


In conclusion, it is critical that business owners, whether actively participating in the business or not, determine whether they are subject to the new reporting requirements under the CTA. Unless expressly stated as an excluded entity, business owners should consult with counsel to ensure they are complying with the new reporting requirements under the CTA.  FinCEN has released a statement on December 7, 2021, stating that there is a public comment period open for the new beneficial ownership information rule that will end on February 7, 2022. FinCEN will likely implement a beneficial ownership information technology system for ease of submitting required information. FinCEN will likely release a statement in the near future regarding the developing infrastructure of such system as to where beneficial owners should submit the required information under the CTA.  

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