The CTA’s Redefinition of a “Corporation”

On January 1, 2024, the Corporate Transparency Act (“CTA”) came into effect, changing our perception of a “corporation” as we know it. In particular, the CTA targets small businesses with no employees, and aims to “combat money laundering, tax fraud, and other illicit activities”. (Thomas Reuters). However, the CTA’s regulatory powers remain broad, requiring all reporting companies to submit a beneficial owner report. Id. A reporting company includes all entities “that are formed or registered to do business in the United States.” (BakerHostetler). The report will include the beneficial owner’s “name, date of birth, address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document.” (Thomas Reuters). A beneficial owner is classified as one that either: (1) maintains significant control over the reported company, or (2) has a 25% equity ownership interest in the reporting company. Id. Under this criterion, over 27 million small businesses fall within the regulatory scope of the CTA. Id. This does not include the 23 types of entities that are exempt from the CTA because they are already regulated under different federal and state laws. (Nicholas McMichen, DeWitt; Sandra Feldman, Wolters Kluwer). This article analyzes the objectives of the CTA, specifically how it arose, along with the implications it has for the effected parties. 

To understand the goals of the CTA, it is important to comprehend what events culminated prior to its enactment in 2021. In 2006, the Financial Action Task Force (“FATF”) “criticized the United States for failing to comply with a FATF standard on the need to collect beneficial ownership information.” (Robert Downes, ABA). Under the Obama administration, the proposed Incorporation Transparency and Law Enforcement Assistance Act aimed to put the responsibility on individuals that formed corporations to disclose beneficial owner information in an effort to prevent and deter corporate misconduct. Id. However, the bill was met with criticism and left untouched by Congress. Id. In the following years, similar bills were proposed but were never acted upon. Id.

The CTA is under the umbrella of the Anti-Money Laundering Act of 2020. Id. Congress passed the National Defense Authorization Act (“NDAA”), which included the Anti-Money Laundering Act, by overriding former President Trump’s veto of the bill. Id. The CTA aims to create a database that will “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.” Id. Before the CTA was passed, financial institutions bore the responsibility of ensuring they had beneficial ownership information of the reporting companies. Id. This burden now shifts to the reporting companies with stringent penalties for noncompliance under the CTA. Id.

What does the CTA entail for beneficial owners? All beneficial owners whose entities were formed before January 1, 2024, will get one year from the Act’s effective date to file an initial beneficial ownership information (“BOI”) report (BakerHostetler). Entities formed from the CTA’s effective date and onward must file their BOI report within 90 days. Id. It is not easy for beneficial owners to comply with the CTA. For beneficial owners to comply with the CTA, they will likely have to turn to their third-party accountants for service assistance because the CTA’s regulations can constantly evolve. (Thomas Reuters). While accounting professionals initially disregarded the CTA’s effect, they are adapting to offer services related to compliance with the CTA. Id. Accounting professionals must verify the accuracy of beneficial ownership information while also servicing the millions of companies effected. (Jorge Yanez, LinkedIn). Accounting companies are elated by the revenue opportunities that come from beneficial ownership reporting, but the newness of the CTA reporting may present challenges for accountants as they must navigate how beneficial ownership reporting may impact their client’s tax structure. Id.

Accountants are not the only ones effected by the CTA. Law firms are also intrigued by the CTA’s possible effects, including the Act’s stringent penalties for a beneficial owner’s noncompliance. (Beverly Odom, Wolters Kluwer). The extent of liability that the CTA will impose for noncompliance is still unknown – whether it will impact law firms, the business entity, or the accounting firm. Id. A law firm may face liability if they fail to act in accordance with the regulations of the CTA or fail to report any suspicious activity about their client. Id. Law firms want to stay fully informed to ensure their client is adhering to the rules “as a potential beneficial owner.” Id. This requires attention to detail on their client’s private data to remain compliant with the CTA. Id. A client may not like the idea of law firms accessing excessive personal data – though this may save the client from noncompliance with the CTA. Id.

There is no advantage to remain noncompliant with the regulatory scheme of the CTA. If a beneficial owner intentionally fails to report beneficial ownership information, they may face criminal liability and fines of up to $10,000. Id. This may not sound like a lot, but the CTA does not target the traditional “corporation”. These beneficial owners may comprise small, local businesses who would be severely impacted by a $10,000 fine. This is why potential beneficial owners, accounting firms, and law firms want to work to ensure compliance with the CTA. Despite the steep penalties, law firms and accounting firms will want to work with these beneficial owners because of the revenue opportunities. Id. The CTA’s broad regulatory scope, however, leaves a lot of questions unanswered. Critics of the CTA argue that it remains unclear which parties will be held liable for noncompliance. Id. Can an accounting firm be fully liable for failure to properly fill out their client’s BOI? Or should a law firm be fully liable for failing to tell their client that they fall under the CTA’s regulations?

Despite the issues with the scope of the CTA, the CTA’s goal of protecting national security is clear. With illicit and illegal activities through shell companies becoming more prevalent as technology advances, there is a need to heighten security. The CTA, however, appears to place the burden on parties with little insight on how to adhere to the policy. Unless the parties affected by the CTA understand the consequences, there is no clarity as to the extent of the CTA’s regulatory power. Potential beneficial owners are not the only ones effected by the CTA. Accounting firms and law firms will play a vital role in the filing of BOI reports. These firms should have knowledge to the extent of their liability if they fail to properly fill out a BOI report on their client’s behalf.