Written By: David K. Olive
On January 1, 2021, Congress passed the Corporate Transparency Act (the “CTA”). The CTA, among other things, requires every corporation, LLC, or similar entity that meets the definition of a “Reporting Company” to make a filing with the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) identifying its beneficial owners or owners. The CTA’s intent is to prohibit “malign actors” from concealing their ownership of corporations, LLCs, or similar entities to facilitate illegal activities including money laundering, financing of terrorism, tax fraud, and other acts of foreign corruption that harm national security interests. The CTA imposes severe penalties for a failure to comply with these new reporting obligations.
While not a comprehensive list of all changes imposed by the CTA, the most important aspects, and how they may affect you directly, are included below. It should be noted that the legislation directs FinCEN to promulgate implementing regulations within one year of enactment. Regulations and further guidance from FinCEN will need to be reviewed to fully understand the scope and impact of the CTA on business entities.
Definition of “Reporting Company” and Certain Exemptions
The CTA imposes this reporting obligation on “Reporting Companies”. A Reporting Company is defined as a “corporation, LLC, or other similar entity that is created by filing a document with the Secretary of State or a similar office under the law of a state or Indian Tribe, or formed under the law of a foreign country and registered to do business in the United States by the filing a document with the Secretary of State or a similar office under the laws of a state or Indian Tribe.” This definition would seem to include most, if not all, business entities. However, there are several exemptions. The broadest exemptions include, but are not limited to, the following:
- An entity that (i) employs more than 20 people, (ii) filed a tax return reporting gross receipts in excess of $5 million, and (iii) has a physical presence in the United States.
- Entities already subject to close federal regulation or supervision, including public companies reporting under Sec. 12 or Sec. 5(d) of the
- Securities Exchange Act, investment companies, non-profit entities exempt from taxation under Sec. 501(c) of the Internal Revenue Code, financial institutions, insurance companies, public utilities, and broker-dealers.
- Pooled investments.
- An entity owned or controlled by an otherwise exempt entity.
- “Dormant Entities” as defined by the CTA.
Information Required to be Reported Under the CTA
The CTA states that in accordance with regulations prescribed by the Secretary of the Treasury, a report shall identify each “beneficial owner”
- Full legal name;
- Date of birth;
- Current residence or business address; and
- Unique identifying number from an acceptable document, such as a passport, driver’s license, or other form of state identification.
A “beneficial owner” is defined as an individual who directly or indirectly, through any contract, arrangement, understanding, relations or otherwise (i) exercises substantial control over an entity or (ii) owns or controls not less than 25% of the ownership interests of an entity. The CTA provides certain exclusions to this definition, which are not discussed here.
An “applicant” is defined as an individual who files an application to form a corporation, LLC, or similar entity or registers or files an application to register a non-United States entity in the United States.
FinCEN will keep the reported information in a database that will not be accessible to the public. The information will be retained for no less than five years after the date the reporting entity terminates. Under the CTA, FinCEN is permitted to disclose the information, upon request, to:
- A federal law enforcement agency engaged in national security, intelligence, or law enforcement activity.
- A federal agency requesting information on behalf of a law enforcement agency, prosecutor, or judge of a foreign country.
- A state, local, and Tribal law enforcement agency pursuant to a court order.
- Financial institutions, with the Reporting Company’s consent, for customer due diligence purposes.
- A federal functional regulator or other appropriate regulatory agency authorized to determine the compliance of financial institutions with customer due diligence laws.
Timeline for Compliance
Required compliance with the CTA does not start until January 2022, the deadline for Congress to enact the regulations. After January 2022, there are different deadlines for compliance based on the timeline of entity formation and changes in beneficial ownership.
Recommended Next Steps
The owners, managers, and legal advisors of existing entities, and those who plan on forming a new entity or registering a non-United States entity, should carefully review the CTA and the coming regulations to determine if their entity meets the definition of a Reporting Company. If their entity is required to report they may wish to begin taking the necessary steps to comply with their beneficial owner reporting.