BACKGROUND

In a December 5 alert, we provided a detailed summary of the Corporate Transparency Act (CTA). In a nutshell, under the CTA, entities referred to as “reporting companies” are required to report to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury certain information (i.e., full legal name, date of birth, residential street address, unique identifying number, such as a driver’s license or passport number, and an image of the document from which the unique identifying number was obtained) about their “beneficial owners.” In general, a reporting company is any entity created by filing a document with a state’s secretary of state office. A beneficial owner is any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests in a reporting company.

While there are 23 types of entities that are exempt from the CTA’s reporting requirements, a substantial majority of private businesses will be subject to the CTA’s reporting requirements. The CTA requires any reporting company in existence before January 1, 2024, to disclose to FinCEN the required information about its beneficial owner(s) by January 1, 2025, and any reporting company established on or after January 1, 2024, to report such information to FinCEN within 90 days of receiving actual or public notice that its creation is effective. Failure to report can result in substantial civil, and even criminal, penalties.

TRUSTS AREN'T SUBJECT TO THE CTA'S REPORTING REQUIREMENTS

Many individuals who may be contemplating establishment of a new business will find providing information to a governmental agency about beneficial owners to be invasive and onerous. As a possible, viable alternative, such individuals might consider establishing and using trusts through which to conduct business operations in place of corporations, partnerships and limited liability companies. Such a trust could have a combination and succession of trustees and/or trust protectors or directors, and they could be given, respectively, different levels and/or types of responsibilities. They could function like a conventional board of directors and, as such, could employ agents who would be like officers in the corporate context. The trust beneficiaries could have beneficial interests crafted to make them analogous to shareholders, partners or members. The trust instrument could limit the trustee and/or protector or director’s fiduciary duties to mirror directors’ fiduciary duties in the corporate context.

Proceeding in this fashion would not trigger the CTA’s reporting requirements. A trust can’t be a reporting company under the CTA because a trust isn’t an entity created by filing a document with a state’s secretary of state.