CTA Compliance in the USA
According to the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), criminals often engage in illicit activities in the United States by using shell corporations and LLCs that are incorporated in jurisdictions with undisclosed owners and managers.
Since business entities in the United States are formed and registered through the respective Secretary of State in the State of incorporation, many of which do not require the disclosure of founders or managers, it is difficult for the United States to track who is associated with the business entities formed in the country.
Understanding the CTA
In response to these issues, the Corporate Transparency Act (CTA) represents a significant shift in corporate governance and transparency in the U.S. federal legislation. According to the U.S. Federal Government, the CTA and its Beneficial Ownership Reporting Requirements were enacted to enhance corporate transparency and combat money laundering, drug trafficking, and other financial crimes.
Under the CTA, certain companies must report their beneficial ownership information to FinCEN.Beneficial owners are individuals who, directly or indirectly, have (1) substantial control over the company or (2) own at least 25% of its ownership interests. This corporate transparency information helps law enforcement and regulatory agencies in the United States to prevent activities like money laundering, terrorism financing, and tax evasion.
Understanding these requirements, including the procedures for properly dissolving an entity to avoid reporting obligations, is crucial for both small and large businesses in the United States.
Beneficial Ownership Reporting Requirements
Under the CTA, companies must report beneficial ownership information to FinCEN if they fall within the scope of the law.
The critical elements of beneficial ownership reporting include:
- Who Must Report: LLC’s or Corporations formed or registered to do business in the U.S. by filing paperwork with the Secretary of State of any State in the United States, with certain exceptions, must report their beneficial owners.
- What Must Be Reported: Information such as the beneficial owner's name, date of birth, address, and a unique identifying number from an acceptable identification document.
- When to Report: Initial reports must be filed by January 1, 2025, with updates required within 30 days of any change in beneficial ownership information.
Dissolving an Entity: Avoiding Reporting Obligations
FinCEN has updated its FAQ's to clarify the compliance requirements under the CTA and beneficial ownership reporting rules for LLCs or corporations that were administratively dissolved or formally dissolved before January 1, 2024.
A company that ceased to exist as a legal entity before January 1, 2024, is not required to report its beneficial ownership information to FinCEN. To avoid the reporting requirements, a company must have entirely completed the process of formally and irrevocably dissolving the entity before this date.
- Filing Dissolution Paperwork: Submit the necessary dissolution documents to the Secretary of State in the jurisdiction where the company was created or registered. This step formalizes the intent to dissolve the entity.
- Receiving Written Confirmation: Obtain written confirmation of dissolution from the relevant jurisdictional authority, ensuring that the dissolution process is officially recognized.
- Paying Related Taxes and Fees: Settle any outstanding taxes or fees associated with the entity. This includes ensuring that all financial obligations to the state, local, and federal governments are met.
- Ceasing Business Operations: Stop all business activities, ensuring that the company is no longer conducting any operations that could imply its continued existence.
- Winding Up Affairs: Complete the process of winding up, which involves liquidating assets, paying off debts, and closing all bank accounts associated with the company.
Important Considerations for Compliance
If a LLC or Corporation continued to exist as a legal entity at any time on or after January 1, 2024, then it must report its beneficial ownership information to FinCEN, even if it had ceased conducting business before this date.
Similarly, companies created or registered on or after January 1, 2024, must comply with reporting requirements even if they dissolve before the initial report is due – 90 days after it has been registered with the Secretary of State in the State where the entity was formed.
Adminsitrative Dissolutions
It is very important to note that according to FinCEN, administrative dissolutions or suspensions, such as those due to non-payment of fees or
non-compliance with jurisdictional requirements, do not equate to a company ceasing to exist as a legal entity unless the dissolution or suspension becomes permanent.
Conclusion
The Corporate Transparency Act introduces stringent requirements for reporting beneficial ownership information, aimed at enhancing transparency and deterring financial crimes.
Companies must be diligent in understanding these obligations and take appropriate steps to comply. For entities that ceased to exist before
the reporting requirements took effect, ensuring complete and formal dissolution is key to avoiding reporting responsibilities.
Della Torre Law, PLLC
