The Corporate Transparency Act (CTA) went into effect on Jan. 1, 2024. This federal reporting requirement affects millions of U.S. businesses, and non-compliance with the statute can lead to serious penalties.
To gain a better understanding of CTA, whether and how it may affect you, and what steps you should take, read on.
Corporate Transparency Act
The impetus for enacting the CTA was the federal government, specifically the Financial Crimes Enforcement Network, wanting to gain greater transparency into holding companies either owned or operated by foreign investors. We have millions of business entities in the United States running diverse operations across every industry. For many of these businesses, the federal government lacks insight into who owns them, where ownership and operations money comes from, and whether there are illegal activities stemming from foreign involvement in ownership and operations. CTA is intended to help clarify ownership of certain types of entities to better ensure transparency into who owns and operates businesses.
From a high-level perspective, what's important to know about CTA is it applies to every business owner. Whether you're in healthcare or any other industry, if you currently own or operate an entity or planning to form a new entity for any venture, CTA applies to you. With that said, for most business owners, CTA will not be a significant issue of concern. For smaller entities, like "mom-and-pop" companies, achieving compliance will largely require submitting a simple ownership report. For mid-market companies with regional operations that have different layers of ownership with holding companies, CTA should also not be a burden. It's possible these entities will meet one of the 20-plus identified exemptions, which would eliminate the requirement to report. Even if individual ownership in a holding company doesn't meet an exemption, the same process for the mom-and-pops would apply here: submit ownership and management information to meet the requirement.
Where CTA may cause some consternation is for larger funds or funds that include foreign investment. If such entities do not meet an exemption, they may need to disclose ownership. In some instances, this may be a very unwelcome development, such as when operators do not want to disclose ownership for reasons like estate planning or litigation. As organizations get larger, reporting requirements can become more complicated and unwanted.
For companies formed before Jan. 1, 2024, the initial ownership report is due no later than Jan. 1, 2025. Entities formed in 2024 must submit their initial report within 90 calendar days of the date the entity is created or registered.
CTA reporting requirements are likely to affect businesses in a similar way to Paycheck Protection Program (PPP) loans and related pandemic relief programs. As businesses are going through and conducting transactions, CTA is largely going to be another box that needs to be checked. It's probably not going to require much work for or apply to most businesses. But in some scenarios, it's going to be difficult and feel intrusive. The anonymity that was once afforded via entity formations is going away, and unless you meet an exemption, you must disclose the information outlined under the CTA.
What Business Owners Should Do
With CTA now in effect, the first step business owners should take is to determine whether their current operations or entities qualify for disclosure. The statute itself, what must be disclosed, and what qualifies for an exemption is complex, which is why owners should turn to an expert for help. CTA expertise will largely come from one of two sources: legal counsel or a CPA. On the latter, many CPAs are aware of this process and the requirements because they're involved with entity formations.
The next step would concern those owners currently expanding operations, such as by setting up new entities in different locations/jurisdictions or entering into joint-venture agreements with other entities. These owners would need to move quickly to determine whether they are required to disclose ownership because of the shorter reporting timeline noted above.
With that said, business owners would be wise not to delve into the statute themselves. It's confusing, and it can be difficult to determine when an entity is eligible for an exemption. An advisor knowledgeable on CTA should ask a list of questions that generates the information needed to determine whether disclosure is necessary.
What business owners should also not do is ignore the CTA or try to feign ignorance about the new requirements. Willfully not filing ownership documentation can be considered a criminal act.
To summarize: CTA is an important new law for business owners. It affects all owners, so if you own a healthcare business or any other business, you need to figure out how CTA affects you. Work with an advisor to determine your responsibilities. If you try to intentionally ignore the law, expect repercussions.
Bradley M. Smith ATP, CM&AA
Managing Director/Partner
For over 20 years I have held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT and home health care company, and BMS Consulting, where I have provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, I am a regular columnist for HomeCare magazine and HME News, where I focus on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies.
At VERTESS, I am a Managing Director and Partner with considerable expertise in Private Equity Recapitalizations, HME/DME, Home Health Care, Hospice, Medical Devices, Health IT/Digital Health, Lab Services and related healthcare verticals within the US and internationally.
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