By: Tahmina Chowdhury
The Corporate Transparency Act Explained
The Corporate Transparency Act ( the “CTA” or the “Act”) went into effect on January 1, 2024.[1] This Act requires certain entities in the United States, including Delaware limited liability companies (LLCs) and corporations, to report information regarding their beneficial owners on a form called the Beneficial Ownership Information (the “BOI”) to the Financial Crimes Enforcement Network (the “FinCEN”) of the U.S. Treasury.[2] The CTA is intended to combat money laundering, terrorist financing, corruption, and tax fraud.[3] Consequences of not filing include civil penalties of no more than $500 per day if a reporting violation occurs and for individuals who criminally violate the Act, fines of no more than $10,000, imprisonment for no more than two years, or both.[4]
The timeframe for a domestic reporting company to file the initial BOI varies based on the date of formation. Domestic reporting companies are corporations, LLCs, and other entities that are formed by filing a document with the secretary of state or any similar office.[5] If a domestic reporting company was formed before January 1, 2024, the entity must file an initial report by January 1, 2025.[6] Reporting companies formed or registered on or after January 1, 2025, have thirty calendar days to file the initial BOI reports after receiving actual or public notice that the entity was formed or registered, whichever occurs first.[7] The Act further provides that any domestic reporting company formed in 2024 must file a BOI report within ninety calendar days of either receiving actual notice that its formation was effective or when the secretary of state, or similar office, provided public notice of formation, whichever occurred first.[8]
How The CTA Affects Delaware Businesses
The CTA established beneficial ownership reporting requirements for Delaware corporations and LLCs.[9] In 2022 alone, there were 1,403,986 LLCs and 386,254 corporations in Delaware.[10] Many of these entities are now required to disclose information regarding their beneficial owners under the CTA. A beneficial owner is any individual “(1) who directly or indirectly exercises substantial control” over the reporting company, or (2) who directly or indirectly owns or controls 25[%] or more of the “ownership interests” of the reporting company.”[11] To exercise “substantial control” over a reporting company, the individual must direct, determine, or exercise substantial influence over important decisions the company makes.[12] The reporting information regarding each beneficial owner includes the individual’s legal name, date of birth, residential street address, unique identifying number from an acceptable identification document, and an image of the identification document.[13] If Delaware corporations and LLCs do not fall into a category of exemptions, these filing procedures must be adhered to.
Because 68.2% of all Fortune 500 companies were incorporated in Delaware in 2022[14], some Delaware corporations may be exempt from filing. A large operating company is one example of a company exempt from CTA reporting requirements.[15] For an entity to be considered a “large operating company” it must employ more than twenty full-time employees in the United States, have an operating presence at a physical address in the U.S., and file income tax returns demonstrating more than $5M in gross receipts or sales.[16] Delaware trusts are also not considered reporting companies for purposes of the CTA.[17] However, if an individual is utilizing Delaware entities within estate planning ventures or in connection with personal business interactions, the obligation of possible disclosure may affect the ongoing administration of these relevant entities.[18] In this case, it may be helpful for individuals to have a preliminary understanding of the CTA. For a list of all current exemptions to the CTA, click here.
Conclusion
Overall, Delaware corporations and LLCs, as well as anyone looking to form a new business entity, should tread with caution and abide by the applicable regulations to avoid any fines. It is important to monitor beneficial owners of an entity regardless of exemption status in case of a change to exemption where an exempt entity may be required to begin submitting reports to FinCEN.[19] The formation process for new entities will not be as simple as it used to be since companies now have to gather information necessary for the BOI reporting before official formation, which may interfere with company deadlines.[20] One recommendation is for entities to develop a system for updating and correcting beneficial ownership information regularly and implementing agreements requiring anyone who may become a beneficial owner to provide updated information in the future.[21] If an entity does not want to implement such agreements, the entity may also explore using third-party tools to maintain the secrecy and integrity of its confidential data.[22] Being informed of new rules and regulations will result in proper adherence with the applicable laws relating to entity disclosure and avoid any fines or penalties resulting from non-adherence.
About the Author
Tahmina is a third-year law student at Widener University Delaware Law School expected to graduate in May 2024. She received her Bachelors in Marketing and Masters in Business Administration from William Paterson University. She plans to take the New Jersey bar exam after graduation.
[1] The Corporate Transparency Act (CTA), IACA, https://www.iaca.org/about-iaca/corporate-transparency-act/ (last visited Mar. 20, 2024).
[2] Id.
[3] Id.
[4] Jonathan B. Wilson, The Corporate Transparency Act and Beneficial Ownership Reporting Requirement, LexisNexis (April 27, 2023), https://www.lexisnexis.com/community/insights/legal/practical-guidance-journal/b/pa/posts/the-corporate-transparency-act-and-beneficial-ownership-reporting-requirement.
[5] The Corporate Transparency Act (CTA), supra note 1.
[6] Id.
[7] Id.
[8] Id.
[9] The Corporate Transparency Act (CTA), supra note 1.
[10] Annual Report Statistics, Delaware Division of Corporations: 2022 Annual Report, Delaware Division of Corporations, https://corpfiles.delaware.gov/Annual-Reports/Division-of-Corporations-2022-Annual-Report-cy.pdf.
[11] The Corporate Transparency Act (CTA), supra note 1.
[12] Id.
[13] Id.
[14] Annual Report Statistics, supra note 10.
[15] The Corporate Transparency Act (CTA), supra note 1.
[16] Id.
[17] The Corporate Transparency Act –An Overview, Richards Layton & Finger (Dec. 11, 2023), https://www.rlf.com/the-corporate-transparency-act-an-overview/#:~:text=Beginning%20on%20January%201%2C%202024,criminal%20penalties%20possible%20for%20noncompliance.
[18] Id.
[19] Lauren Brooks & Karen Redman, All You Need to Know About Corporate Transparency Act Compliance, Agile Legal, https://agilelegal.com/all-you-need-to-know-about-corporate-transparency-act-compliance/ (Mar. 3, 2024).
[20] Id.
[21] Corporate Transparency Act: Impact on Securitization Issuing Entities, Dentons (Nov. 21, 2023), https://www.dentons.com/en/insights/alerts/2023/november/21/corporate-transparency-act-impact-on-securitization-issuing-entities.
[22] Wilson, supra note 4.