The Corporate Transparency Act of 2024 (hereinafter CTA), enacted in January 2021, will take effect on January 1, 2024. The CTA is a new federal law program designed to limit or penalize illegal activities such as tax evasion and money laundering caused by insufficient corporate ownership information requirements under U.S. state laws. Most small and medium-sized enterprises (SMEs) must mandatorily register information about their Controlling Interest or Beneficial Owner Information (hereinafter BOI) with the Financial Crimes Enforcement Network (FinCEN) under the U.S. Department of Treasury. With less than a month remaining until the law takes effect on January 1, 2024, we would like to briefly inform you about the obligations of U.S. SMEs that must comply with the CTA.
1. Introduction to the CTA
All companies within the U.S. (including Corporations, LLCs, LLPs, etc.) that are not recognized as exceptions by the U.S. Department of Treasury must report and register their beneficial owners with FinCEN.
Here, a beneficial owner refers to any individual who, regardless of any special legal relationship or basis, directly or indirectly (1) exercises substantial control over the company or (2) owns or controls 25% or more of the company’s ownership interest.
Simply put, companies exempted by the U.S. Department of Treasury must meet all three of the following criteria:
1) Already regulated companies (e.g., publicly traded companies, banks, financial institutions, etc.)
2) Maintain 20 or more employees and annual revenue exceeding $5 million
3) Operate a physical office within the United States
2. Background
The U.S. Department of Treasury has long argued that laws in countries such as those in Europe are insufficient to restrict illegal activities like tax evasion and money laundering by SMEs.
According to a 2023 report by the U.S. Small Business Administration, there are over 33 million SMEs in the U.S., of which approximately 82%, or about 27 million, are classified as “non-employer firms” with no employees, indicating a significant lack of corporate transparency.
Therefore, the primary target and purpose of the CTA are understood to be preventing and penalizing tax evasion, money laundering, or illegal concealment of funds by U.S. SMEs, especially non-employer firms or those with hidden BOI, rather than large corporations or certain financial firms already subject to government audits and regulations.
3. Key Provisions of the CTA
Reporting Requirements
Currently, it is understood that only four types of BOI will be required:
1) Full legal name of the BOI
2) Date of birth
3) Current residential or business address of the individual or entity
4) Personal identification number (e.g., resident registration number, driver’s license number, passport number, Social Security number). It is possible that an actual photo of the identification (e.g., resident ID card) may need to be uploaded to the FinCEN website.
Reporting Method
You can complete and submit the report via the FinCEN internet site.
Before January 1, 2024, forms or access rights for BOI reporting will not be provided. It is expected that relevant information will be available on FinCEN’s beneficial ownership information webpage starting from the new year.
Entities Subject to Reporting
Not only Corporations, LLCs, and LLPs but also trusts are considered entities subject to reporting. (* Trusts are one of the entities frequently used in the U.S. for asset management purposes.)
Controlling Interest Owners
Under the current interpretation of the CTA, shareholders, directors, and individuals who influence the business or financial aspects of the company are broadly interpreted as controlling interest owners.
Reporting Period
For companies established before January 1, 2024, the required reporting under the CTA must be completed within one year.
For companies established in the U.S. after January 1, 2024, the required reporting must be completed within 30 days from the date of establishment.
4. Penalties for Violating the CTA
The CTA stipulates penalties for non-compliance, including fines ranging from $500 per day up to a maximum of $10,000, and imprisonment for up to two years.
5. Q&A
Q1. Does a person with “substantial control” include executive-level officers?
A1. Yes. Most corporate executives (e.g., company president, CEO, CFO, COO, etc.) are considered to have substantial control over the company and are therefore interpreted as subjects for BOI reporting. As you can see, multiple beneficial owners (both ownership and controlling interest holders) may exist for a reporting company’s BOI.
Q2. Does the count of 20 employees include part-time employees or interns?
A2. No. Under the current interpretation of the CTA, there must be 20 or more full-time employees employed within the U.S.
Q3. If annual revenue exceeds $5 million this year but does not exceed $5 million next year, will there be an obligation to report BOI next year?
A3. Yes. According to the current interpretation of the CTA, if the revenue fails to meet the exemption criteria in any given year, BOI reporting and submission are required.
Q4. When calculating annual revenue, can sales from affiliates or foreign (outside of the U.S.) sources be included?
A4. Yes. Under the current interpretation of the CTA, even if total income or revenue from external or foreign companies is excluded from the U.S. company’s total income or revenue according to U.S. federal income tax principles, such amounts are still interpreted as exceeding the $5 million threshold.
Q5. What if BOI changes before or after CTA reporting?
A5. If there are changes to the reporting subject’s BOI, the related information must be updated with FinCEN within 30 days from the date of change. (When reporting to FinCEN, you will receive a FinCEN ID, allowing you to update your account accordingly.)
6. Conclusion
Since the detailed provisions of the CTA are written and interpreted very broadly, it is expected that almost all SMEs in the U.S. will be affected by this law.
BOI will be accessible to U.S. federal, state, and local government agencies (and foreign government agencies as necessary). However, please remember that access will not be granted to the general public, outsiders, or private companies.
Many Korean SMEs and startup companies entering the U.S. market will also need to prepare more thoroughly from the stage of establishing and registering their U.S. entities. We recommend preparing well in advance.
Jung Wook, Foreign Attorney (New York State, USA)
※This article is based on content supplied by Law Times.
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