Included within the 2021 National Defense Authorization Act passed on January 1, 2021, the Corporate Transparency Act (CTA) requires certain small businesses based in the U.S. to report the identities of their owners and organizers to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The CTA is an update to the federal government’s anti-money laundering laws and is designed to crack down on shell companies created for illicit financial activities, such as money laundering and funding terrorist organizations. While the CTA is aimed at providing greater transparency into who owns and controls small businesses in the U.S., it stands to impact many legitimate small companies by requiring them to provide reports on the identities of their owners. At the same time, the new law may also affect future business transactions, such as mergers and acquisitions, by making the process more logistically complex, with less privacy for certain organizational structures like limited liability companies (LLCs), which have historically been used to avoid disclosing detailed ownership information.
That said, if your business doesn’t have many owners or investors, the CTA will likely not be a major hassle. And for those companies that do have multiple owners or investors, the law will primarily increase your administrative and logistical duties, as you seek to stay in compliance with its new reporting requirements and deadlines.
The CTA’s new requirements don’t go into effect until January 1, 2022, and at the moment, there are still several ambiguous aspects of the law, including exactly how ownership and control of business entities is determined. To this end, you should work with legal counsel like us ahead of the law’s implementation to ensure you are fully aware of whether your business is subject to the CTA, and if it is, you fully understand what the reporting requirements will be.
Meanwhile, here we’ll outline the major aspects of the CTA and discuss how you can prepare your company to comply with the law should you find that you are subject to its reporting requirements. For further clarification and support with reporting your company’s ownership information, meet with us as your Family Business Lawyer™.
Who Does the CTA Affect?
To better understand the CTA, it helps to clarify exactly which businesses it will affect. According to the U.S. Department of the Treasury, the purpose of the CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by creating a national registry of beneficial ownership information for “reporting companies.” Within this stated purpose, the two terms that are most essential to understanding the law are “beneficial owners” and “reporting companies.” Let’s look at both of these terms here:
Reporting Companies
Under the CTA, subject to certain exclusions, the definition of a “reporting company” is extremely broad and includes any corporation, limited liability company, or similar entity that is (1) created by filing a formation document with a secretary of state or similar office; or (2) formed under the law of a foreign country and registered to do business in the United States.
While the definition of a “reporting company” would include most privately held businesses in the U.S, the CTA expressly excludes some business entities from its requirements. These exclusions include the following:
- Companies operating in highly-regulated industries such as banks, credit unions, brokers, dealers, etc.
- Publicly traded companies
- Tax-exempt entities, such as nonprofits
- Companies that: 1) employ more than 20 employees on a full-time basis in the U.S.; 2) have annual aggregate gross receipt or sales greater than $5 million; and 3) have an operating presence at a physical office within the U.S.
Beneficial Owners
While the CTA provides a lengthy list of exceptions to its requirements, if you do find that you are subject to the law, you will be required to provide a report of the identity of your “beneficial owners.” Under the CTA, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- Exercises substantial control over the entity
- Owns or controls at least 25% of the ownership interests in the entity
Note that the CTA doesn’t define the terms “substantial control” or “ownership interests,” so we expect future updates on the law will provide clarification on these terms.
As with the definition of reporting companies, there are several exceptions to the definition of a “beneficial owner.” These include the following:
- A minor child, if the child’s parent’s or guardian’s information is reported properly
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual
- An individual acting as an employee whose control is derived solely because of employment status
- An individual whose only interest in the entity is through a right of inheritance
- A creditor of the entity, unless the creditor meets the requirements of a beneficial owner.
Based on these exceptions, if privacy of your ownership interests is extremely important to you for any reason, please contact us, so we can discuss the possibilities available to you using trusts or nonprofit entities to hold your business interests.
Applicants
In addition to the requirement that you submit a report identifying the “beneficial owners,” of your business entity, the CTA also requires that you submit similar information identifying individuals who organized your company, called “applicants.” To this end, an “applicant” is defined as any individual who does the following:
Files an application to form a corporation, limited liability company, or similar entity under the laws of a state or Indian tribe
Registers or files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the U.S.
Reporting Requirements
If you are subject to the CTA as a reporting company, you are required to submit a report to FinCEN that includes the identity of each beneficial owner and applicant that are applicable to your business. The information to be included in each of these reports is as follows:
- full legal name
- date of birth
- residential or business street address
- a unique identifying number from an acceptable identification document, including a U.S. passport; state driver’s license; another state-issued identification document; or a current non-U.S. passport for individuals who do not hold any U.S.-issued identification documents.
When Does the CTA Go Into Effect?
Although the CTA is technically already in effect, you still have time to learn more about its requirements and begin compiling your ownership data. The official start date for the CTA’s reporting requirements are tied to when the Treasury promulgates the CTA’s regulations, which must take place no later than January 1, 2022, but may become effective sooner. Compliance with the CTA depends on whether a reporting company was formed prior to or after the effective date of the regulations being promulgated. If your business entity is formed before the effective date, you will have two years to deliver your ownership reports to FinCEN. If your entity is formed after the effective date, you must comply with the CTA reporting requirements upon formation or registration of your entity. In either case, changes in your entity’s previously reported information must be reported within one year.
Penalties for Noncompliance
The CTA imposes various penalties for reporting companies that fail to comply with its requirements or provide inaccurate or misleading information to FinCEN. As such, any person that commits reporting violations may be held liable for fines up to $500 per day, not to exceed $10,000, and may face up to two years in prison for violating the CTA.
How is the CTA Ownership Information Stored, and Who Has Access?
Information provided to FinCEN on beneficial owners and applicants will be kept in a secure, confidential national registry maintained by the Treasury. Such information will be maintained for at least five years after the termination of a reporting company.
To ensure confidentiality, a reporting company’s ownership information may only be released, upon following appropriate protocols to the following entities: federal agencies engaged in national security, intelligence, or law enforcement activity; state, local, or tribal law enforcement agencies upon court order; federal agencies on behalf of a foreign agency, prosecutor, or judge under an international treaty or agreement; financial institutions subject to customer due diligence requirements, upon the consent of the reporting company; and federal functional regulators.
Stay Tuned For Updates and Clarification
Given the ambiguous nature of certain parts of the CTA, we expect there will be future clarification regarding the scope of the law and its reporting requirements. We will closely monitor any changes to the CTA and as well as cover the implementing regulations once they are promulgated and update you on these developments in future blog posts.
Until then, if you have any questions about the CTA or would like support in implementing your ownership reporting, reach out to us, as your Family Business Lawyer™, today to book your appointment.
This article is a service of Greg Gordillo, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Schedule your LIFT Session today!