Once the Corporate Transparency Act goes into effect—as soon as regulations are issued by the U.S. Treasury Department, which, according to the Act, will be by January 1, 2022—new companies will be required to register with the Treasury at the time of formation or registration, and existing companies will be required to register within two years from the effective date of the regulations.
In addition, reporting companies will be required to report any changes in beneficial ownership information within one year from the date that such information changes.
The penalties for willfully failing to comply with the Act are substantial and include civil penalties of up to $500 per day that a violation continues, a criminal fine of up to $10,000, and imprisonment for up to two years.
The Act requires the Treasury to maintain the information reported in a secure database. The Treasury is prohibited from publicly disclosing such information; however, limited disclosure to other governmental agencies and financial institutions is permitted in certain situations.
As with most new laws, there are many questions and issues that hopefully will be addressed in the forthcoming regulations, such as what constitutes substantial control and how indirect ownership is determined.
While the regulations are being prepared, businesses should begin implementing policies and procedures to stay in compliance with the reporting required by the Act.
Background
On January 1, 2021, the Corporate Transparency Act became law. The Act requires new and existing companies to report information about their beneficial owners and applicants to the Treasury.
Congress estimates that more than 2 million corporations and limited liability companies are formed in the U.S. each year. Many states do not require the disclosure of information about the owners of such companies upon formation.
For example, the organizing document to form a limited liability company in the state of Delaware only requires the name of the limited liability company and the name and address of the registered agent, which is often a commercial service company.
What does the Corporate Transparency Act do?
Congress is concerned that individuals may be concealing the ownership of these entities so that they may be used to facilitate illicit activities.
The Act was enacted to facilitate national security and to assist intelligence agencies and law enforcement in their efforts to prohibit money laundering, counterfeiting, and financing terrorism.
What does the Corporate Transparency Act require?
The Act requires reporting companies to report the name, date of birth, current address, and unique identifying number (from an acceptable identification document such as a driver’s license or passport) for each applicant and beneficial owner.
A beneficial owner includes any individual who directly or indirectly exercises substantial control over a reporting company (but excluding a person whose control is derived strictly from employment) or owns or controls a 25% or more interest in a reporting company.
An applicant is any individual who files an application to form a corporation, limited liability company, or similar entity in any state or who registers a foreign corporation, limited liability company, or similar entity in any state, such as an organizer or incorporator.
What types of companies must comply with the regulations?
A reporting company is any non-exempt corporation, limited liability company, or similar entity that is created under the laws of any state or formed under the laws of a foreign country and registered in any state. Exempt companies include banks, publicly traded companies, insurance companies, and tax-exempt organizations, and most notably any company that has:
- More than 20 full-time employees in the U.S.;
- A physical office in the U.S.; and
- More than $5,000,000 in gross receipts or sales in the aggregate.
Not included in the exemptions are most startup and smaller companies, which will be reporting companies under the Act.
What does this mean for future M&A transactions?
Acquiring companies will need to conduct due diligence in order to determine whether potential acquisitions are reporting companies and to determine all indirect beneficial owners.
In addition, purchase and sale agreements will need to include representations and warranties relating to the reporting obligations under the Act, such as current compliance and responsibility for reporting changes resulting from the transaction.
