Navigating the Corporate Transparency Act: What Alabama Business Owners Need to Know

Navigating the Corporate Transparency Act: What Alabama Business Owners Need to Know

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The Corporate Transparency Act (CTA) went into effect in January 2024 and may require your small business to report information about ownership to the government.

The CTA impacts millions of businesses and knowing its new requirements and its potential impact is essential to avoid criminal and civil penalties.

The Corporate Transparency Act (CTA), a significant piece of legislation aimed at enhancing financial transparency and combating illicit activities, went into effect on January 1, 2024. This new law introduces necessary reporting requirements for many businesses operating in the United States, including those in Alabama. As a business owner or manager, it is essential to understand the implications of the CTA and ensure your company’s compliance.

What is the Corporate Transparency Act? 

The Corporate Transparency Act is part of the Anti-Money Laundering Act of 2020, enacted to prevent criminals, organized crime rings, and other illicit actors from using complex corporate structures to hide their identities and launder money through the U.S. financial system. The CTA requires most corporations, limited liability companies, and other similar entities created in or registered to do business in the United States to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.

Who Must Report? 

The CTA defines a “reporting company” broadly, encompassing most privately held corporations, limited liability companies, and similar entities organized in any state, as well as foreign companies registered to do business in the United States. This includes:

  • Corporations
  • Limited Liability Companies (LLCs)
  • Limited Partnerships (LPs)
  • Limited Liability Partnerships (LLPs)
  • Limited Liability Limited Partnerships (LLLPs)
  • Business Trusts

It’s important to note that while the CTA casts a wide net, there are several exemptions. Entities exempt from reporting include:

  • Public companies (those registered under the Securities Exchange Act of 1934)
  • Governmental entities and public utilities
  • Banks, credit unions, and bank holding companies
  • Broker-dealers and registered investment advisors
  • Registered investment companies and certain pooled investment vehicles
  • Insurance companies
  • Registered public accounting firms
  • 501(c) non-profit entities
  • Entities owned or controlled by one or more exempt entities

Companies with more than 20 full-time employees in the United States, more than $5 million in gross receipts or sales inside the United States, and an operating presence at a physical office in the United States are also exempt from reporting.

Who is Considered a Beneficial Owner?

Under the CTA, a “beneficial owner” is defined as an individual who, directly or indirectly:

  • Exercises substantial control over the reporting company, or
  • Owns or controls 25% or more of the ownership interests of the reporting company.

The term “substantial control” is broadly defined and includes:

  • Service as a senior officer of the reporting company.
  • Authority over the appointment or removal of any senior officer or a majority of the board members.
  • Direction, determination, or substantial influence over important company decisions.
  • Any other form of substantial control over the reporting company.

Certain individuals are excluded from the definition of beneficial owner, including:

  • Minor children
  • Nominees, intermediaries, custodians, or agents acting on behalf of another person
  • Employees whose control over or economic benefits from the entity derive solely from their employment status
  • Individuals whose only interest in the entity is through a right of inheritance
  • Creditors of the entity (unless they otherwise meet the definition of a beneficial owner)

What Information Must Be Reported? 

Reporting companies are required to provide the following information for each beneficial owner:

  • Full legal name
  • Date of birth
  • Current residential or business street address
  • A unique identifying number from a non-expired identification document (such as a U.S. passport, state-issued driver’s license, or state identification card) and a photo of such document

Alternatively, if the beneficial owner has previously obtained a FinCEN identifier, that number can be provided instead of the above information.

Reporting Deadlines

The CTA establishes different reporting deadlines based on when a company was formed or registered to do business:

For entities formed on or after January 1, 2024:

  • Initially, these entities have 90 days from the date of formation to submit their beneficial ownership report (this applies only for the 2024 calendar year).
  • Beginning January 1, 2025, newly formed or registered entities will have 30 calendar days to file their initial report.

For entities already in existence or registered to do business as of January 1, 2024:

  • These companies must submit their initial beneficial ownership report by January 1, 2025.

For all reporting companies:

  • Any changes to previously reported information must be updated within 30 calendar days of the change occurring or within 30 days of becoming aware of inaccurate information previously filed.

How to Report Beneficial Ownership Information

Reporting companies are required to submit their beneficial ownership information reports through FinCEN’s website. The filing process is free, and FinCEN provides filing instructions, step-by-step guides, and other resources to assist filers in completing their reports accurately and on time.

Penalties for Non-Compliance

The CTA establishes both civil and criminal penalties for non-compliance. Individuals who willfully provide false or fraudulent beneficial ownership information, or who willfully fail to report complete or updated information, may face:

  • Civil penalties of up to $500 per day that the violation continues;
  • Criminal penalties of up to $10,000, two years imprisonment, or both.

These penalties underscore the importance of timely and accurate reporting under the CTA.

Implications for Alabama Businesses

For many Alabama businesses, particularly small and medium-sized enterprises, the CTA introduces new compliance obligations that require careful attention. Here are some key considerations for Alabama business owners and managers:

  • Determine if your business is a “reporting company” under the CTA. Review the exemptions carefully to see if your entity qualifies for any of them.
  • If your business is subject to reporting, identify all beneficial owners according to the CTA’s definition. This may include individuals who don’t have a direct ownership stake but exercise substantial control over the company.
  • Gather the required information for each beneficial owner, ensuring its accuracy and completeness.
  • Mark your calendar with the appropriate reporting deadline based on your company’s formation date.
  • Implement processes to track changes in beneficial ownership information and ensure timely updates to FinCEN.
  • Consider seeking legal counsel to ensure full compliance with the CTA’s requirements.

Embracing Transparency and Ensuring Compliance in Alabama’s Business Landscape

The Corporate Transparency Act represents a significant shift in corporate reporting requirements, aimed at enhancing financial transparency and combating illicit activities. As we move further into the implementation phase of the CTA, it is likely that FinCEN will continue to provide guidance and clarification on various aspects of the reporting requirements. Alabama businesses should stay informed about any updates or changes to the reporting process and seek professional guidance when needed to navigate this new regulatory landscape.