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”).
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.
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.
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.
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.
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).
