By Jennifer Leung.
On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) as part of the 2021 National Defense Authorization Act. The CTA requires most private companies formed in the U.S. or registered to do business in the U.S. to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) bureau of the U.S. Department of the Treasury. Although the CTA is intended to eliminate the anonymity of individuals that use shell companies for illegal activities, the reporting requirements will affect legitimate private companies. Companies should be aware of and prepare for the new reporting requirements to avoid civil and criminal penalties for failure to file the information when required.
Companies that are required to report their beneficial owners and applicants to FinCEN under the CTA are any corporation, limited liability company, or other similar entity that is either formed in the U.S. or formed under the law of a foreign country and registered to do business in the US. Certain companies are exempt from the reporting requirements, including:
It is unclear whether the scope of “other similar entity” under the CTA will include partnerships (general or limited) or trusts until the regulations under the CTA have been adopted. The CTA regulations would be consistent with existing FinCEN’s customer due diligence rules if it includes limited partnerships and business trusts but excludes general partnerships and most estate planning trusts.
Reporting will not begin until the Secretary of the Treasury has adopted regulations detailing how the CTA will be implemented, which adoption is mandated by January 1, 2022.
FinCEN must also establish a registry to collect the identifying information on a reporting company’s beneficial owners and applicants. Reporting companies must file a report with FinCEN upon formation or registration, containing the following information regarding its beneficial owners and applicants:
Companies formed before the regulations are adopted will have a two-year period after adoption of the regulations to file their initial reports.
Companies will also be required to submit annual reports to reflect any changes to the identifying information.
A “beneficial owner” is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise owns or controls 25% or more of the ownership interest of an entity, or exercises “substantial control” over an entity.
The CTA does not define “substantial control.” The regulations will likely contain complex rules for measuring ownership and determining who is in control, as well as how to treat multi-tiered companies and related parties.
The five exclusions from the definition of a beneficial owner include:
An “applicant” means any individual who files an application to form a reporting company or registers or files an application to register a reporting company to do business in the United States. This requirement is noteworthy because a reporting company would need to file identifying information for the individual who files the application to form the company even if that individual is not a beneficial owner. This could conceivably include individuals at law firms that act as agents to create the company.
FinCEN will hold the information that is gathered on beneficial owners and applicants in a confidential and secure database. Information will only be released in response to a request from law enforcement agencies engaged in national security, intelligence, or law enforcement activity, and if the reporting company consents, financial institutions subject to and in order to comply with customer due diligence requirements.
Companies or individuals who violate the CTA will be subject to civil penalties of not more than $500 per day, capped at $10,000, and imprisonment of up to two years if an individual willfully provides false information or fails to report.
Until the Secretary of the Treasury has adopted regulations, companies should assume that not only corporations and LLCs, but partnerships, trusts, and other entities, will be covered by the CTA.
Management of reporting companies should assess the requirements of the CTA, and determine whether their company’s operative documents should include:
Investment funds should consider adding similar representations and covenants by their investors to their subscription and management agreements. Lenders should also consider adding similar representations and covenants by their borrowers to their loan documents.
For questions, or to further discuss how to prepare your business to comply with the Corporate Transparency Act, please contact Jennifer Leung at email@example.com, Sara Finigan at firstname.lastname@example.org, or any of the Coblentz Corporate team.