At the beginning of, 2021, Congress slipped the so-called Corporate Transparency Act “CTA”), a new business reporting obligation, into the National Defense Authorization Act of 2021. Among other things, the CTA requires every corporation and LLC as well as other entities that meet a definition of a “reporting company” to make a filing with the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to identify its “beneficial owners”. The Act also imposes severe penalties for a failure to comply with this new reporting obligation.
Although it is scheduled to be effective in less than a year (on Jan. 1, 2022), multiple questions remain. Notably, the CTA does not define a number of key terms, and also does not provide details on the reporting process, relying on the Department of Treasury to promulgate implementing regulations and other guidance from expected from FinCEN.
The CTA casts this broad net with the intention of thwarting persons who might conceal their ownership of corporations, LLCs, or other business entities to facilitate illicit activity including money laundering, financing of terrorism, tax fraud, and other acts of corruption.
The CTA’s initial and updating reporting requirements apply to “reporting companies” which include, in addition to corporations and LLCs, other business entities created by filing a document with a state’s Secretary of State (or a similar office) or formed under the law of a foreign country but registered to do business in the United States.
However, not every business entity is subject to this reporting. Reporting is not required for entities already subject to close federal regulation or supervision, including public reporting, non-profit entities exempt under Sec. 501(c) of the Internal Revenue Code, financial institutions, insurance companies, public utilities, and broker-dealers. Controlled subsidiaries are generally exempt. Larger private companies are also generally exempt if they meet the CTA’s requirements of: (i) employing more than 20 people, (ii) filing a tax return reporting gross receipts in excess of $5 million, and (iii) having a physical office presence in the United States.
Subject to certain exceptions, persons controlling the entity or holding 25% or more of the ownership are “beneficial owners”; and, the information the CTA requires reporting companies provide with respect to beneficial owners includes the owner’s (i) full legal name, (ii) date of birth, (iii) current residence or business address, and (iv) “unique identifying number from an acceptable document such as a U.S. passport, a driver’s license, or other state identification document.
During the period prior to the effectiveness of the reporting requirements, counsel should be pro-actively working with clients to modify the organizational documents of both existing business entities and forms used for new companies to facilitate gathering and permit disclosure of the information which will be required to be submitted as well as, where appropriate, modifying current beneficial ownership structures.