By Kaitlyn Vance.
The Purpose of the Corporate Transparency Act
Congress signed the Corporate Transparency Act (CTA) into law on January 1, 2021, which requires certain corporate entities to disclose identifying information. The CTA increases transparency about the ownership and control of corporate entities in hopes of deterring money laundering, terrorist financing, tax fraud, and other illegal acts. Before the CTA’s reporting requirements, bad actors could conceal ownership of corporate entities by using shell companies. By requiring entities to disclose certain identifying information, Congress believes it can better protect national interests and more successfully counter the illegal acts mentioned above.
Prior to the CTA’s enactment, businesses were only obligated to provide the required identifying information if the Financial Crimes Enforcement Network (FinCEN) directly solicited it. Now, business entities have an affirmative obligation to provide the required information within the time period prescribed by the CTA. The CTA is estimated to affect 32 million business entities in the United States and about 627,000 in Arizona alone.
How It Works: The CTA’s Requirements
Each business entity is required to file a report unless the entity is exempt. Most of the entities in Arizona, however, are not exempt. While the CTA provides around two dozen exemptions, they are mostly applicable to entities already subject to substantial federal or state regulation like banks, securities firms, and utility companies. The exemptions also cover large or inactive entities that meet certain additional requirements.
As of January 1, 2024, FinCEN began accepting the information reports that are required by the CTA. The required report must contain information about the company itself, its beneficial owners, and, if the entity was created after January 1, 2024, its company applicants. A beneficial owner is someone who exercises substantial control over a company, including those who own or control twenty-five percent or more of the company. A company applicant is someone who files the document that creates the entity. Thus, if lawyers, paralegals, or other law firm employees file clients’ entity formation documents with the state, they may qualify as company applicants.
The information that beneficial owners and company applicants must report includes names, dates of birth, addresses, and some information from drivers’ licenses or passports. Information about the company itself must also be reported, such as the entity’s name, any other name the company may be doing business as, addresses, and its federal tax identification number.
Companies that were created or registered before 2024 must file reports by January 1, 2025. If a company is registered in 2024, it must file the required report within ninety days of registration, and companies created in future years will have thirty days to file. The report only needs to be filed once, and there is no fee associated with the filing. However, anytime ownership information changes or a correction needs to be made, the corrections or changes must be reported within thirty days.
The penalties for noncompliance can be severe. The penalties allowed under the CTA for willful noncompliance include both civil and criminal penalties. Penalties can include up to $500 per day for each day the violation continues. Additionally, a criminal penalty may be imposed which is not to exceed $10,000 and/or two years in prison. Therefore, it is important that non-exempt businesses keep up with the CTA’s requirements.
So, What Does This Mean for the Non-Exempt Businesses?
Before the CTA went into effect, smaller companies operating in the United States had few legal compliance obligations. Typically, these companies simply filed a formation document after deciding on a business structure and state of formation. Now, if the entity is not exempt, it will need to create procedures for keeping up with the requirements of the CTA. It will be necessary for businesses to establish internal procedures for maintaining and updating the information required to be reported as well as monitoring the ongoing requirements that may be imposed. Businesses will need to stay on top of compliance to avoid facing the severe penalties discussed above. Additionally, businesses’ lawyers, paralegals, and other law firm employees who assist with the entities’ formation filings should be aware that they may also need to disclose identifying information on the CTA report.
FinCEN created and posted a Small Entity Compliance Guide, which explains the CTA and its requirements in plain language to help small businesses comply. Additionally, the Arizona Corporation Commission is taking steps and creating resources to support Arizona businesses that are adjusting to the new requirements. The Arizona Corporation Commission issued a news release with an overview of the CTA, followed by some frequently asked questions. The Commission is also posting other resources and alerts to keep businesses updated. While the Arizona Corporation Commission will not accept the CTA’s required reports nor have access to them or any of the information contained in them, the Commission intends to include a link on its website to direct Arizona businesses to FinCEN’s site to file reports.
While the CTA requires more of small businesses than they may be used to, it seems that both FinCEN and the Arizona Corporation Commission are doing their best to make the CTA and its requirements understandable and doable. Hopefully in the coming years, these requirements will become second nature for small businesses, and the CTA will have successfully deterred money laundering, tax fraud, and other illegal acts, as Congress intends.
By Kaitlyn Vance
J.D. Candidate, 2025
Kaitlyn Vance is a 2L Staff Writer for the Arizona State Law Journal. Before law school, Kaitlyn earned degrees in Business Law and Finance from Arizona State University. She is interested in pursuing a career practicing transactional law. In her free time, Kaitlyn enjoys working out, traveling, and finding new restaurants.