In January of 2021, Congress passed the Corporate Transparency Act of 2019 (the “CTA”) as part of the 2021 Defense Bill. Initially introduced in 2019, the CTA requires private companies to disclose their “Beneficial Owners” to the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Nearly two million corporations, limited liability companies (“LLCs”), and other business entities are formed nationwide each year. Most states, including Maryland and Virginia, do not require information about the Beneficial Owners of these entities when they are formed. The District of Columbia does require disclosure of Beneficial Ownership information. States that do not require reporting of Beneficial Owner information allow the Beneficial Owners of these companies to conceal their identities. This feature is often used to protect the owner’s privacy or for strategic reasons. Probably the most famous case of using anonymous corporations is Walt Disney, who used them to acquire vast swaths of land in Central Florida that was ultimately used to construct Walt Disney World. However, Congress and the law enforcement community were concerned that anonymous ownership of business entities aided criminals in the commission of crimes like terrorism, money laundering, piracy, tax evasion, and securities fraud. The lack of Beneficial Ownership information makes it more difficult for law enforcement to investigate and prosecute these crimes. The CTA was passed to address this information gap and provide transparency in business ownership to law enforcement.
What is a “Reporting Company”?
In order to determine whether the CTA requires a company to report Beneficial Ownership information to FinCEN, you must first determine whether the entity is a “Reporting Company” under the CTA. A “Reporting Company” is any corporation, LLC, or other legal entity formed under U.S. law, and any foreign legal entity registered to conduct business in the U.S., by filing a document with a state or tribal government office. For example, in Virginia, the formation of a corporation requires the filing of Articles of Incorporation with the State Corporation Commission (“SCC”), the formation of an LLC requires the filing of Articles of Organization with the SCC, and the formation of a limited partnership (“LP”) requires the filing of a Certificate of Limited Partnership. Conversely, a general partnership is formed solely by two or more people associated as co-owners to carry on a business for profit. That means a Virginia corporation, LLC, or LP is a Reporting Company under the CTA, but a Virginia general partnership is not.
Does the Reporting Company qualify for any of the exemptions under the CTA?
There are 23 types of exempt entities under the CTA, all of which fall into four general categories:
- A “Large Operating Company” is any entity with: (A) more than 20 full-time employees in the U.S.; (B) an operating presence at a physical office within the U.S. (i.e., regularly conducts business at a physical location in the U.S. that the entity owns/leases and that is physically distinct from the place of business of any unaffiliated entity); and (C) filed a Federal income tax/information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales (excluding sales generated from outside the U.S.).
- An “Inactive Entity” is an entity that: (A) was in existence on or before January 1, 2020; (B) is not engaged in active business; (C) is not directly or indirectly owned by any foreign person; (D) has not had any change in ownership in the preceding 12 months; (E) has not sent or received funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12 months; and (F) does not hold any assets.
- Entities subject to significant U.S. government regulation, specifically securities reporting issuers; governmental authorities; banks, credit unions, bank holding companies, and money service businesses; securities brokers/dealers, securities exchanges/clearing agencies, other entities registered under the Securities Exchange Act of 1934, investment companies and investment advisors, venture capital fund advisers, and insurance companies as defined under the Investment Company Act of 1940 or the Investment Advisers Act of 1940; state licensed insurance producers; certain registered entities under the Commodity Exchange Act or registered with the Commodity Futures Trading Commission under the Commodity Exchange Act; public accounting firms registered under section 102 of the Sarbanes-Oxley Act of 2002, public utilities; financial market utilities; pooled investment vehicles operated by certain otherwise exempt entities; and certain tax-exempt entities (e.g., under Section 501(c) of the Internal Revenue Code).
- Subsidiaries of certain exempt entities under the CTA.
What information must be reported to FinCEN?
Reporting Companies are required to report their full legal name and any trade name or “doing business as” name, address of their principal place of business in the U.S., jurisdiction of formation (or registration, if a foreign entity), and their Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) (or if a foreign Reporting Company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction).
Reporting Companies are also required to report certain information about their “Beneficial Owners” and “Company Applicants”. For each Beneficial Owner and Company Applicant, the Reporting Company is required to report their name, date of birth, address, unique ID number (e.g., passport, driver’s license, state ID, foreign ID (for foreign individuals with no U.S. identification)), and an image of the ID document containing such ID number.
What is a “Beneficial Owner”?
The CTA defines a “Beneficial Owner” as “any individual who, directly or indirectly, either exercises substantial control over such Reporting Company or owns or controls at least 25 percent of the ownership interests of such Reporting Company.” Substantial control and ownership interest are broadly defined.
What is “Substantial Control”?
An individual has “substantial control” of a Reporting Company if the individual: (A) is a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function (a “Senior Officer”); (B) has authority over the appointment or removal of any Senior Officer or a majority of the board of directors (or similar body); (C) directs, determines, or has substantial influence over important decisions made by the Reporting Company, (e.g., the nature, scope, and attributes of the business of the Reporting Company, including the sale, lease, mortgage, or other transfer of any of its principal assets; (2) the reorganization, dissolution, or merger of the Reporting Company; (3) major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of its operating budget; (4) selection or termination of its business lines or ventures, or geographic focus; (5) compensation schemes and incentive programs for Senior Officers; (6) entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; (7) amendments of any of its substantial governance documents, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or (D) has any other form of substantial control over the Reporting Company.
Some examples of direct or indirect (e.g., as a trustee of a trust) substantial control include: (A) board representation; (B) ownership or control of a majority of the voting power/rights; (C) rights associated with any financing arrangement or interest in a company; (D) control over one or more intermediary entities that separately or collectively exercise substantial control over a Reporting Company; (E) arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or (F) any other contract, arrangement, understanding, relationship, or otherwise.
What constitutes an “Ownership Interest”?
An ownership interest in a Reporting Company includes any equity, stock, interest in a joint venture, certificate of interest in a business trust, capital or profit interest, convertible securities (e.g., SAFEs, convertible notes), futures, warrants, options (except to the extent that such option is created and held by a third party or third parties without the knowledge or involvement of the Reporting Company), and any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.
An ownership interest may be directly or indirectly owned or controlled through any contract, arrangement, understanding, relationship, or otherwise, including: (A) joint ownership of an undivided interest in such ownership interest; (B) through another individual acting as a nominee, intermediary, custodian, or agent; (C) if held in trust: (1) as a trustee or other individual with the authority to dispose of trust assets; (2) as a beneficiary who: (i) is the sole permissible recipient of income and principal from the trust; or (ii) has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or (3) as a grantor/settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust; or (D) through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the Reporting Company.
How are Ownership Interests calculated?
An individual’s ownership interests are calculated as a percentage of the total outstanding ownership interests of the Reporting Company (A) including any options or similar interests held by the individual whether or not exercised; (B) for Reporting Companies that issue capital or profit interests (e.g., entities treated as partnerships for federal income tax purposes), the individual’s capital and profit interests calculated as a percentage of the total outstanding capital and profit interests of the entity; (C) for corporations, entities treated as corporations for federal income tax purposes, and other reporting companies that issue shares of stock, the applicable percentage shall be the greater of: (1) the total combined voting power of all classes of ownership interests of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote, or (2) the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interests; and (D) if the facts and circumstances do not permit the calculations described in (B) or (C) to be performed with reasonable certainty, any individual who owns or controls 25 percent or more of any class or type of ownership interest shall be deemed to own or control 25 percent or more of the ownership interests of the Reporting Company.
Are there any exceptions to the definition of Beneficial Ownership?
An individual who would otherwise qualify as a “Beneficial Owner” but meets the criteria of any of the following categories is not a “Beneficial Owner for purposes of the CTA: minors (provided the Reporting Company reports the required information of a parent or legal guardian of the minor child); individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual; employees of a Reporting Company, acting solely as an employee, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee, provided that such person is not a Senior Officer; individuals whose only interest in a Reporting Company is a future interest through a right of inheritance; and creditors of a Reporting Company.
What is a “Company Applicant”?
A “Company Applicant” is “the individual who directly files the document that creates the domestic Reporting Company” (or, with respect to a foreign Reporting Company, files the document that first registers the foreign Reporting Company) and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.
When are the deadlines for reporting Beneficial Ownership information to FinCEN?
The CTA reporting period begins January 1, 2024. Reporting Companies formed before January 1, 2024 will have until January 1, 2025 to comply. Reporting Companies formed from January 1, 2024 and before January 1, 2025 are required to file their Beneficial Ownership reports within 90 days after receiving actual or public notice that its creation or registration is effective (“Notice of Formation”). Reporting Companies formed on or after January 1, 2025, are required to file their Beneficial Ownership reports within 30 days after receiving Notice of Formation. For example, a Reporting Company may receive actual notice that its creation is effective through a direct communication from the secretary of state, SCC, or a similar office or public notice that its creation is effective because it appears on a publicly accessible registry maintained by the secretary of state, SCC, or a similar office. Additionally, Reporting Companies are required to file an amendment within 30 days of any changes to the information previously reported to FinCEN. For example, if there are Beneficial Ownership changes (e.g., new individual acquires 25% ownership interest, Beneficial Owner dies or sells equity resulting in less than 25% ownership, changes to Beneficial Owner’s address, new CEO is appointed, minor child turns 18 years old) or a previously exempt Reporting Company no longer qualifies for an exemption. The termination or dissolution of a Reporting Company does not require an updated filing.
What are the penalties for failure to comply?
The penalties for failure to report information required under the CTA (including causing a Reporting Company to be unable to file a true, correct, and complete Beneficial Ownership report by withholding or providing false information), fraudulently reporting false information to FinCEN, include civil penalties of $500 per day (up to $10,000) and a criminal penalty of up to two years in prison. Penalties may apply to the Reporting Company and its senior officers.
Last updated: December 10, 2023
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