Key Points:
- Unless your company is exempt, the Corporate Transparency Act will require you to disclose the beneficial owners of your company to the government
- This reporting requirement will take effect upon the issuance of enabling regulations, which are to be issued no later than January 1, 2022
- Newly formed entities must report beneficial ownership at the time of formation
- Existing entities will be required to report beneficial ownership within two years of the effective date
On January 1, the National Defense Authorization Act for Fiscal Year 2021 was enacted into law. This bill includes the Corporate Transparency Act (the “CTA”) which creates a beneficial ownership registry within the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), requiring certain corporations and limited liability companies to report information on their “beneficial owners” to FinCEN. The stated purpose of the CTA and the registry is to prevent the use of U.S. companies for criminal gain and to assist law enforcement in the detection and prevention of money laundering and terrorist financing by compelling disclosure of a company’s beneficial owners. This rule reflects a growing international trend to require disclosure of beneficial ownership and creates a compliance regime similar to that of many other countries.
Companies Required to Report / Exceptions
Under the CTA, a “reporting company” must file a beneficial ownership statement. A reporting company means a corporation, limited liability company or other similar entity that is:
- created by the filing of a document with a secretary of state or a similar office under the law of a any state or Indian tribe; or
- formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian tribe
There are a number of entities excepted from the definition of “reporting company.” Most significantly, a reporting company does not include any entity that:
- employs more than 20 employees on a full-time basis in the United States;
- has at least $5 million in annual revenue; and
- has an operating presence at a physical office within the United States.
Among the other types of entities that are exempt from the reporting requirements of the CTA are:
- issuers of securities registered under the Securities Exchange Act of 1934;
- churches, charities, nonprofit entities, and any other entity that qualifies for tax-exempt status under sections 501(a), 527, or 4947(a)(1) of the Internal Revenue Code; and
- other companies that have existing reporting obligations to governmental entities (e.g., insurance companies, banks, federal or state credit unions, investment companies under the Investment Company Act of 1940, registered public accounting firms, and public utilities).
Regardless of the exceptions set forth above, it should be noted that the ultimate beneficial ownership of all pass-through entities (e.g., limited liability companies, partnerships, certain trusts, etc.) can already be determined by the IRS and relevant state taxing authorities through the form K-1s filed with each such entity’s tax returns.
Reporting Requirements
A reporting company must report information on each “beneficial owner”, which the CTA defines as any individual who, directly or indirectly: (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity. For each beneficial owner, a reporting company must disclose on a beneficial ownership statement:
- Full legal name;
- Current residential or business street address;
- Date of birth; and
- Identification number (such as a driver’s license or passport number).
A “beneficial owner” does not include:
- a minor child (the information of the parent or guardian must be reported instead);
- an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual;
- an individual acting solely as an employee of a reporting company;
- an individual whose only interest in the reporting company is through inheritance; or
- a creditor of a reporting company.
Timing of Reporting Obligations
The CTA will not become effective until the Department of Treasury issues final regulations. The CTA provides a one-year window for the adoption of such regulations, which means that such regulations may not be issued until later this year. Once effective, the timing for filing a beneficial ownership statement will be as follows:
- Newly Formed Entities. Must file a beneficial ownership statement at the time of formation
- Existing Entities. Must file a beneficial ownership statement within two years of the effective date
Additionally, upon a change in beneficial ownership, a reporting company must update the information provided to FinCEN within one year of such change.
Confidentiality of Reported Information
Information reported to FinCEN will not be available to the public. It is confidential information that will only be made available to Federal and state law enforcement agencies under certain circumstances and only for law enforcement, national security, or intelligence purposes. The Department of the Treasury, which oversees FinCEN, has separate authorization to use the information, including for purposes related to tax administration. Foreign law enforcement also may request information from the database through an appropriate agency of the federal government. Finally, financial institutions, with the consent of the reporting company, will have access to the database for customer due diligence requirements imposed by federal and state laws (e.g., Bank Secrecy Act, USA PATRIOT Act, etc.).
Penalties
Any party that unlawfully discloses any beneficial ownership information will be liable for fines of up to $500 per day and up to $250,000 in the aggregate, and up to 10 years in prison. In addition, any party that intentionally fails to comply with the reporting requirements of the CTA may be liable for fines of no more than $500 for each day that there is a willful failure to report complete beneficial ownership information, and such parties may be subject to aggregate fines of up to $10,000 or a prison term of up to two years.
