A big change is coming for millions of business owners.
On January 1, 2021, Congress passed the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021–by far the longest bill ever passed in the U.S.–with strong bipartisan support. A notable, but easily overlooked, component of this bill was the Corporate Transparency Act (the “CTA”).
Despite the fact that data privacy is a hot topic and a serious concern for people on both sides of the aisle, the CTA essentially eliminates the ability for many business owners and investors to remain anonymous (at least from the federal government). The CTA is intended to strengthen national security by requiring the vast majority of US companies to self-report information regarding each of their “beneficial owners.”
The CTA requirements– which are estimated to affect more than 10,000,000 companies – require entities to report ownership information in an effort to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.”
Historically, an individual could form a business entity without being required to disclose any personal information about its owners. For this reason, the burden of assisting the federal government with monitoring business ownership had primarily fallen on financial institutions, which have been required to verify ownership for their customers under “know your customer” legislation. The CTA shifts much of this burden to entities by requiring them to self-report beneficial ownership information of both direct and indirect owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This new FinCEN database will be used by law enforcement agencies and the IRS to combat money laundering, the financing of terrorism, tax fraud and evasion, human and drug trafficking, financial and securities fraud, and acts of foreign corruption.
What is the Corporate Transparency Act?
On January 1, 2021, Congress passed what ended up being the longest bill ever passed in the United States (and with strong bipartisan support). This bill included the Corporate Transparency Act (the “CTA”), which requires entities to self-report beneficial ownership information of both direct and indirect owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
The CTA was enacted in an effort to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.”
More than 2,000,000 corporations, limited liability companies, and similar entities (each an “Entity”) are being formed in the United States each year – but most (if not all) states do not require disclosure or any information about the beneficial owners of such Entities.
It is Congress’ belief that nefarious actors use this anonymity to conceal their ownership of Entities in order to facilitate illicit activity, including money laundering, financing of terrorism, tax fraud and evasion, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, all of which are harmful to the national security interests of the United States.
Based on the foregoing, Congress felt the CTA was necessary to permit the federal government to collect beneficial ownership information in order to “protect national security interests and better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.”
The CTA and its associated regulations became effective on January 1, 2024.
Who Is Required to Report?
In this section we explore the various classifications and exceptions that shape the landscape of entities subject to or exempted from the reporting requirements as defined by the CTA.
If an entity is deemed as a Reporting Company, it is required to obtain, certify, and file with FinCEN identifying information for:
- The Reporting Company
- All Beneficial Owner(s)
- The Company Applicants
Reporting Company
“Reporting Companies” include any LLC, corporation, or other entity that is created by filing a document with a Secretary of State office (or similar office) unless it is an exempt entity (as discussed below). This includes both domestic entities as well as entities formed outside the U.S. but which register to do business within the U.S.
FinCEN exempted specific types of entities from the definition of Reporting Company. Most of these exemptions are for companies that are already subject to substantial federal and/or state regulation or already must provide beneficial ownership information to the government.
The following entities are exempt from the CTA requirements and are not considered Reporting Companies:
- Large Operating Companies - Entities that meet all of the following criteria:
- Employs more than 20 full-time employees in the United States;
- Has an operating presence at a physical office within the United States; and
- Filed a U.S. federal income tax return for the previous year demonstrating more than $5,000,000 in gross receipts or sales;
- Subsidiaries of Certain Exempt Entities - Entities whose ownership interests are controlled or wholly owned (directly or indirectly) by certain other exempt entities.
- Inactive Entities -Entities that meet all of the following criteria:
- Was in existence on or before January 1, 2020;
- Is not engaged in active business;
- Is not owned, directly or indirectly, by a foreign person;
- Has not experienced a change in ownership in the preceding 12-month period;
- Has not sent or received more than $1,000 in the preceding 12-month period; and
- Does not otherwise hold any kind or type of assets (including an ownership interest in any entity).
- Certain Tax-Exempt Entities - 501(c) tax-exempt organizations, 527(e)(1) tax-exempt political organizations, and 4947(a)(1) or (2) tax-exempt charitable trusts (and certain entities which operate exclusively to provide financial assistance to or hold governance rights over any such entity).
- Certain industries that are already heavily regulated, including:
- Public accounting firms
- Banks, Credit Unions, Depository Institution Holding Companies, and other Money Service Businesses
- Securities Brokers Securities Dealers, Securities reporting issuers, Securities exchange or clearing agencies, and other Exchange Act registered entities
- Investment companies / Investment advisors registered with the SEC
- Venture capital fund advisors
- State-licensed insurance producers
- Commodity Exchange Act registered entities
- Pooled investment vehicles operated or advised by certain other exempted entities
- Financial market utilities
- Regulated public utilities
- Governmental authorities
Beneficial Owner
A “Beneficial Owner” is any individual who, directly or indirectly, either (i) exercises substantial control over a Reporting Company; or (ii) owns or controls at least 25 percent of the ownership interests of such reporting company.”
By including indirect owners in this definition, the CTA is explicitly requiring Reporting Entities to drill down through all layers of ownership until they get to the individuals who are exercising control over the Reporting Company and/or are benefitting from such ownership interest.
Substantial Control: The following guidance was provided to determine if an individual exercises substantial control:
- Service as a senior officer of a Reporting Company;
- Authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of a Reporting Company; and
- Directs, determines, or has substantial influence over important matters affecting a reporting company
This last provision was intentionally drafted as a very broad, catch-all all provision to ensure consideration of any other forms that substantial control might take beyond the criteria specifically listed. Examples of decisions that could indicate substantial control include decisions related to (i) the nature of the business, (ii) the sale, lease or mortgage of important assets; (iii) reorganization, mergers, or dissolutions; (iv) major expenditures; (v) issuances of equity; (vi) approval of operating budget; (vii) selection or termination of business lines or geographic focus; (viii) compensation structure and incentive programs; (ix) entering into or termination of significant contracts; and/or(x) amendments of any substantial governance documents.
If multiple individuals exercise essentially equal authority over such decisions, then each individual would likely be considered to exercise substantial control.
The term, “Ownership interests” is not limited to only actual stock or membership interests in the entity, but also includes the following arrangements:
- Equity, stock, or similar instruments,
- Capital or profits interests;
- Voting trusts;
- Warrants, rights to purchase, puts, calls, straddles, and other instruments that are convertible (either with or without consideration) into an ownership interest; and
- Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.
In determining the percentage of ownership interests owned by an individual, FinCen considers the following:
- Ownership interests are considered as of the present time but with options or similar interests treated as being exercised at the present time;
- Capital and profits interests are calculated as a percentage of the total outstanding capital and profits interest of the company.
- For corporations (or entities treated as corporations for tax purposes or which issue shares of stock), an individual is deemed to own the greater of (i) the individual’s total combined voting power of all classes of ownership interests as a percentage of total outstanding voting power of all classes; or (ii) the total combined value of the individual’s ownership interests as a percentage of total outstanding value of all classes of ownership.
- If the foregoing do not allow an appropriate calculation, then an individual that owns or controls 25% or more of any class or type of ownership interests is a Beneficial Owner.
The term Beneficial Owner does not include the following:
- A minor child (as defined in the state of formation), if the information of the parent or guardian of the minor child is reported;
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
- An individual acting solely as an employee of an Entity;
- An individual whose only interest in an Entity is through a right of inheritance; and
- Creditors (so long as their rights under the applicable loan documents are limited to those that are intended to secure repayment or enhance the likelihood of repayment).
Company Applicant
The Company Applicant is the individual who directly files the document used to create or register the Reporting Company and (if applicable) the individual who is primarily responsible for directing or controlling such filing. This will often be the lawyer or paralegal filing such document on behalf of the Reporting Company. This means that there are often two Company Applicants of a Reporting Company – the individual directly filing the document and the individual primarily responsible for directing or controlling the filing.
What Information Needs to Be Reported?
Reporting Companies must provide information for the Reporting Company, each Beneficial Owner, and (for entities formed after January 1, 2024) the Company Applicant. They must also provide images of the relevant identifying documents for each Beneficial Owner.
- Full name of the Reporting Company;
- All trade names or “doing business as” (d/b/a) names of the Reporting Company (whether or not they are registered);
- Business street address of the Reporting Company (i.e., PO boxes are not permitted);
- State of formation of the reporting company; and
- IRS employer identification number (“EIN”) for the Reporting Company
- Full legal name;
- Date of birth;
- Current residential street address; and
- Either (i) a FinCEN Identifier (discussed below); or (ii) a unique identifying number from an acceptable identification document (e.g., unexpired passport, driver’s license, state issued ID) along with an image of the identification document.
- Full legal name;
- Date of birth;
- Current residential street address (or business address if they are filing in the ordinary course of business); and
- Either (i) a FinCEN Identifier (discussed below); or (ii) a unique identifying number from an acceptable identification document (e.g., unexpired passport, driver’s license, state issued ID) along with an image of the identification document.
- A Beneficial Owner or a Company Applicant can provide a FinCEN Identifier number in lieu of providing the foregoing information for each Beneficial Owner and/or Company Applicant. Reporting Companies can then report such individual’s FinCEN Identifier rather than providing all of the required information for such individual. The individual is then responsible for updating FinCEN with any changes to its reported information – thus eliminating the need for them to report updated information to the Reporting Company and eliminating the onus on the Reporting Company to report such updates to FinCEN.
- An individual can request a FinCEN Identifier by providing the required information to FinCEN.
When Must I File a CTA Report?
Compliance with these timelines ensures accurate and up-to-date reporting within the framework of the CTA regulations.
It is worth noting that there is no mechanism for a Reporting Company to seek an extension to the deadlines discussed in this section.
A Reporting Company in existence prior to January 1, 2024, must file its Initial Report before January 1, 2025.
A Reporting Company formed on or after January 1, 2024, must file its Initial Report within 90 days after the earlier of: (i) the date on which the Reporting Company receives actual notice that its creation/registration has become effective; or (ii) the date on which the secretary of state first provides public notice of the entity’s registration.
A Reporting Company must file an Updated Report within 30 days of any change to information previously reported to FinCEN concerning a Reporting Company or its Beneficial Owners.
It is the Reporting Company’s responsibility (and not the individual Beneficial Owner’s responsibility) to file Updated Reports when required.
Examples of events that could trigger an Updated Report include (but are not limited to) the following:
- Change in ownership of a Reporting Company;
- Change in management of a Reporting Company;
- Death of a Beneficial Owner;
- Beneficial Owner who is a minor reaches the age of majority;
- A Reporting Company becomes eligible for exemption from reporting;
- Any change to the unique identification information provided, which includes
- Address changes
- Name changes (e.g., due to marriage or divorce)
- Change in driver’s license or passport number (e.g., due to a renewal or newly issued document)
A Reporting Company must file a Corrected Report within thirty days after it becomes aware or has reason to know that a previously filed Initial Report or Updated Report was inaccurate when filed and remains inaccurate.
Where and How Can I Submit a Report?
FinCEN is in the Process of creating the “Beneficial Ownership Secure System” (“BOSS”) to receive, store, and maintain information gathered pursuant to the CTA. Reports will be submitted electronically through this online interface.
The BOSS will be secured to a Federal Information Security Management Act “High” compliance level – the highest information security protection level available under the act.
How Is This Being Enforced?
It is a Federal Crime to:
- Willfully provide (or attempt to provide) false or fraudulent beneficial ownership information (including a false or fraudulent identifying photograph or document) to FinCEN;
- Willfully fail to report complete or updated beneficial ownership information to FinCEN; or
- Knowingly disclosing or knowingly using any required information / documents obtained by an individual (unless for authorized purpose).
There are both civil and criminal penalties for Reporting Violations, namely, willfully providing (or attempting to provide) false or fraudulent required information / documents and for willfully failing to report complete or updated required information / documents.
The civil penalties for such Reporting Violations are fines of $500 for each day that the violation continues or has not been remedied, with criminal penalties of fines of up to $10,000 and/or imprisonment for not more than 2 years.
There are also both civil and criminal penalties for Unauthorized Access, namely, knowingly disclosing or knowingly using any required information / documents obtained by the individual (unless for an authorized purpose).
The civil penalties for such Unauthorized Access violations are fines of $500 for each day that the violation continues or has not been remedied, with criminal penalties of fines up to $250,000 and/or imprisonment for not more than 5 years.
A person is not subject to the foregoing civil or criminal penalties if such person
- has reason to believe that a report submitted contains inaccurate information, and
- voluntarily and promptly submits corrected information within 90 days of the original report.
This Safe Harbor does not apply if, at the time of submission, the person acted for the purpose of evading the reporting requirements and had actual knowledge that the information in their report was not accurate.
Notably, even though it is the Reporting Company’s obligation to file and update such reports, individuals can be held personally responsible for violation of the law if they (i) caused the failure to report; or (ii) were a senior officer of the company at the time of such failure to report.