Law in the Marketplace: The federal CTA

Published: 09-02-2023 3:00 PM

On Jan. 1, 2021, Congress passed a new federal law called the Corporate Transparency Act (the “CTA” or the “Act.”) Companies subject to the CTA that were formed before Jan. 1, 2023 must file the reports required by the Act (briefly described below) by Jan. 1, 2024. Companies formed on or after Jan. 1, 2023 must file these reports by Jan. 1, 2025.

The CTA imposes on, among other persons, the owners and managers of virtually all 80,000 New Hampshire LLCs and virtually all 18,000 New Hampshire corporations that are defined by the CTA as “reporting companies” a stringent duty to file reports (briefly described below) with a division of the U.S. Treasury Department called Financial Crimes Enforcement Network ( “FinCen”).

The CTA is lengthy and complex. However, if you are the owner or manager of a New Hampshire business or if you are a lawyer or other professional advising these companies, here are the CTA basics you should know.

The primary purpose of the CTA. The primary purpose of the CTA is to prevent foreign countries hostile to the U.S. from using business entities formed under U.S. state law or foreign companies registered in the U.S. to attack U.S. national security.

The domestic purpose of the CTA. However, the CTA is also intended to prevent criminals from using the above types of companies to commit purely domestic crimes in the U.S.

CTA reporting companies. The companies that the CTA requires to file reports with FinCen are called reporting companies. Under the terms of the CTA, 23 types of companies are exempt from being reporting companies. However, with very few exceptions, the only New Hampshire companies that are likely to be exempt from the CTA reporting companies requirements are those that meet both of two conditions: (a) They have at least 20 employees; and (b) their gross income is at least $5 million. This means that the vast majority of New Hampshire LLCs and corporations (and of all other types of New Hampshire business entities) must meet the requirements applicable to reporting companies.

How the CTA seeks to achieve its purposes. The method by which the CTA seeks to achieve the above purposes is to require “applicants” (defined below) to file reports with FinCen that disclose critical identifying information about (i) companies defined as reporting companies; (ii) persons who are the real owners, even if not listed as owners of business entities; (iii) persons who are the real managers and owners of reporting companies, even if not listed as such in the reporting company’s documents, managers, plus (iv) the applicants themselves — that is, the persons who file documents, including CTA reports to FinCen, on behalf of reporting companies. Confusingly, the CTA describes all of the above persons, including not only business owners and managers but also applicants, as “Business Owners,”; and the CTA identifies all of the information that the applicants must file with the FinCen, including information about reporting company applications, as Business Owner Information.

Reporting company updates. If there is any change in the identity of the real owners and managers of a reporting company, that company must file an update report with the FinCen advising it of that change.

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The Theory Underlying the CTA. The theory that underlies the CTA is apparently that if the Treasury Department has Business Owner Information about the real owners or managers of a company that individuals plan to use for illegal U.S. domestic crimes or to undermine U.S. national security, the company itself and these individuals will not even form or register the company in any state because of their concern that this information will enable the Treasury or other U.S. law enforcement entities to identify the company or these individuals as the agents of these activities and to prosecute them. In other words, in enacting the CTA, Congress intended to provide the Treasury and other law enforcement agencies with transparency about these companies and their real owners and managers of companies that, if formed, might engage in serious illegal misconduct in the United States.

Penalties. The CTA provides that any person violating the reporting requirements of the CTA is liable for civil penalties of not more than $500 for each day that the violation continues and for criminal penalties of imprisonment of up to two years and fines of up to $10,000.

Trusts. Numerous specialized provisions of the CTA deal with non-charitable trusts. I will summarize these provisions in a subsequent column.

Key CTA flaws. In my view, there are at least three potentially major problems with the CTA as currently drafted; they are summarized below. We can only hope that, as soon as reasonably possible, Congress will address these problems in CTA amendments.

First, the CTA requires the Treasury Department to create a massive digital compilation of the owners and managers of tens of millions of individuals and companies. No matter how carefully the Treasury seeks to protect that compilation, there is bound to be a significant risk that one or more hackers will gain access to it.

Second, as discussed above, the CTA will require tens of millions of U.S. companies that are absolutely certain never to commit any of the actions the CTA is intended to prevent to submit, at significant inconvenience and significant cost, company, affiliate and p owner and manager information to the Treasury. It seems unfair and irrational to impose these burdens on these companies.

Third, the CTA will obviously impose enormous and very costly administrative burdens on the Treasury itself.

The practical meaning of the CTA for New Hampshire companies. As noted above, many tens of thousands of New Hampshire companies are reporting companies within the meaning of that Act, and if the CTA learns that any of these companies have failed to file reports with the FinCen, their owners, managers and applicants will be subject to major and criminal penalties. The statistical likelihood that FinCen will ever make CTA claims against any New Hampshire companies is slight, but these companies can avoid this risk by making these filings.

If any readers of this column have questions about the potential applicability of the CTA to their companies, they should feel free to give me a call. I’ll be glad to answer their questions.