Clients with business entities have had some planning flexibility to be able to maintain privacy regarding the ownership and control of LLCs, LPS, and corporations. The Corporate Transparency Act (the “CTA”) significantly changes your obligations to disclose previously private information regarding the ownership and control of these entities.
With the stated goal of countering money laundering, the financing of terrorism, and other illicit activity, Congress enacted the CTA on January 1, 2021 as part of the National Defense Authorization Act. Under the CTA, most domestic businesses and foreign businesses registered to do business in the U.S. will now be required to disclose personal identifying information about their beneficial owners, senior officers, and other control persons to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). On December 7, 2021, FinCEN released the Notice of Proposed Rulemaking (the “Proposed Regulations”), seeking to implement the beneficial ownership reporting requirements of the CTA. Reporting obligations under the CTA will take effect on the effective date of the final regulations.
The CTA creates a national registry of beneficial ownership information for “reporting companies.”
Who Must File: Definition of Reporting Company
A reporting company is defined as any corporation, limited liability company, or similar entity that is (1) created by filing a formation document with a secretary of state or similar office or (2) formed under the law of a foreign country and registered to do business in the United States.
Small businesses are most likely to be affected by the CTA.
The disclosure requirements do not apply to any entity with:
- more than twenty full-time employees in the United States,
- more than $5,000,000 in gross receipts or sales, as shown on the previous year’s federal income tax return, and
- a U.S. based physical office.
Meanwhile, heavily regulated companies, including banks, brokers and broker dealers, publicly traded companies, and investment companies, along with certain of their subsidiaries, likewise are generally exempt. Larger entities that have a lot of employees or reporting for other purposes are not designed to be captured by CTA because there are other regulatory agencies monitoring those entities.
Reporting companies are required to deliver to FinCEN a report containing the following information for each beneficial owner and company applicant of the reporting company:
(1) full legal name,
(2) date of birth,
(3) current residential or business street address, and
(4) unique identifying number from an acceptable identification document (such as a passport) or FinCEN identifier.
A beneficial owner is defined as, with respect to an entity, an individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25% of the ownership interests of the entity. Notably, the phrase “substantial control” is not defined in the CTA. Beneficial owners do not include minor children if the information of their parent or guardian is reported; an individual acting as a nominee, intermediary, custodian, or agent; an employee whose control is derived solely from the employment status of that person; an individual whose right in interest is through a right of inheritance; or a creditor, unless that person exercises substantial control or owns more than 25% of the ownership interests or the reporting company.
In addition to providing the required information about each beneficial owner, the reporting company must also provide the required information for the company applicant. The Proposed Regulations give the term “company applicant” a very broad definition for purposes of requiring filings with FinCEN. The definition would include the individual who filed the application to form the business entity (such as the certificate or articles of incorporation, or certificate of formation). For foreign entities, a company applicant would be the individual who files the application or document that first registers the entity to do business in the United States. It not only includes the actual person that made the filing but also any person who directs or controls the filing of the relevant document by another person or entity. This would include your Sprouse attorney, to the extent that we filed the document or caused it to be filed.
For business entities formed after the effective date of the CTA final regulations, the reports will be due to FinCEN 14 days after the date of initial filing with the Secretary of State (or similar authority).
For existing business entities, although the CTA itself would have permitted business entities up to two years to file initial reports, the Proposed Regulations provides that the time to file initial reports with FinCEN will be shortened to only one year. Accordingly, if the final regulations adopt the language from the Proposed Regulations, initial reports for existing non-exempt business entities will be required to be filed with FinCEN within one year from the effective date of the regulations.
Failure to Report
Failure to comply with the CTA’s reporting requirements once the final regulations are in effect can lead to civil and criminal penalties, which may include a maximum civil penalty of $500 each day the violation continues (up to $10,000), and imprisonment for up to two years.
What to Do Now?
While the rules may be adjusted in part before becoming final, we advise clients to start identifying all of the reporting companies in their structures and gathering information and necessary documents on all of the beneficial owners and company applicants.
If you would like more information, you can reach out to one of the attorneys at Sprouse Shrader Smith, PLLC to review your business entity structure and help prepare you for the reporting requirements of the CTA.
Article by Suzannah Snider