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What Attorneys Should Know About the Corporate Transparency Act

How are you dealing with the Corporate Transparency Act (CTA)?

 

If you are like me, you really did not pay much attention to the CTA until recently.  Perhaps this article is the first you have heard of it.

 

If you have not been paying attention, now is the time to take notice and consider what you are doing in your practice and how it may affect your business.

 

 So, what exactly is the corporate transparency act?

 

The CTA went into effect as of January 1, 2024 and it requires that any “corporation, limited liability company or other similar entities that are either (1) created by filing a document with a secretary of a state or Indian tribe, or (2) formed under the law of a foreign country  and registered to do business in the United States disclose the identity and information regarding any “beneficial owner” of the business.

 

The CTA exempts 24 specific types of entities from registration including banks, insurance companies, entities with more than 20 employees, $5 million in Gross revenue and a physical office in the US.

 

The beneficial owner is defined as an individual who (1) exercises substantial control over the entity or (2) owns or controls not less than 25% of the ownership interests of the entity.  With some exceptions for children, creditors, and a few others. The definition of “substantial controls” is vague at best.

 

New CTA entities formed after January 1 will require the disclosure of the beneficial owners.  This disclosure includes full legal name, Date of birth, current address, and identification information from a driver’s license or passport along with an image of that documents. It also imposes ongoing update filing if that information changes for at least 5 years after the reporting company terminates.  

 

Now here is the rub for attorneys and their clients, the law does not only apply to new business entity formation, it applies to existing entities.

 

The CTA imposes serious criminal penalties upon the beneficial owners for non-compliance with the disclosure requirements starting with the potential for $500 per day penalty, along with potential for a $250,000 fine and 5 years in federal prison.

 

As a result, the CTA will require tens of millions of Americans to either disclose their personal information to FinCen through state registered entities or risk years in prison time and thousands of dollars in civil and criminal fines.

 

So, what are you doing for your clients that you incorporated?  Is it malpractice to not reach out and inform?  What role are you going to play in the reporting process?

 

This situation has been further complicated by the March 1 court ruling in National Small Business United v. Yellen. The US District Court for the Northern District of Alabama ruled the law was unconstitutional and granted injunctive relief.  The Government has stated that they will appeal and are expressing an intention to limit the injunction to the party to that lawsuit.

 

Certainly, other litigation will be forthcoming.

 

So, what are you going to do for your clients?

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