The Corporate Transparency Act: A Guide to Beneficial Ownership Disclosure
The Corporate Transparency Act (“CTA”) is a recently enacted federal law that imposes significant reporting requirements on most U.S. companies, including corporations, partnerships, and limited liability companies. Effective January 1, 2024, new companies will immediately face significant new disclosure duties upon formation. For existing companies, the rules become effective on January 1, 2025, and entities that are not exempt from the law must make similar disclosures prior to that date if they were in existence as of December 31, 2023.
The CTA was passed on January 1, 2021 as part of the Anti-Money Laundering Act of 2020. On September 30, 2022, the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) finalized the reporting requirements to implement the CTA and published guidance on the final regulations. The CTA’s reporting requirements aim to combat money laundering, tax fraud, and other corrupt activity that is facilitated by using entity structures to conceal the identities of perpetrators.
In light of the CTA’s significant reporting requirements, those preparing to form entities―and principals of existing companies―should prepare for the additional steps the law will add to the entity formation process and the new regulatory requirements. This alert offers a summary of the CTA and its current implementing regulations, while shedding light on the various complexities, inquiries, and subtleties concerning the practical implementation of the CTA.
Who is Required to Report?
The CTA mandates reporting of beneficial owners and applicants to FinCEN for the following types of companies:
- Domestic corporations, limited liability companies, or other entities (such as limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships) that are established through the submission of a document to a secretary of state or a comparable office, including a Tribal (American Indian or Alaska Native) office.
- Foreign corporations, limited liability companies, or other entities (such as limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships), or their foreign equivalents, such as sociétés anonymes, that are established under the laws of a foreign country and are registered to do business in any state or tribal jurisdiction through the submission of a document to a secretary of state or a comparable office, including a Tribal office.
Are There any Exemptions?
There are 23 types of entities that are exempt from the reporting requirements for beneficial ownership information, most of which are already regulated entities that report such information to regulators. The full list of exempt entities is contained in the final rule: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements, which include:
- exempt Securities Issuers including (but not limited to) SEC reporting issuers,
- investment companies registered under the Investment Company Act of 1940,
- investment advisers registered with the SEC under the Investment Advisers Act of 1940 and venture capital advisers as defined in Section 203(I) of the Advisers Act,
- private investment funds that rely on Section 3(c)(1) or 3(c)(7) of the Investment Company Act provided the fund is advised by a federally registered investment adviser,
- brokers or dealers in securities registered with the SEC pursuant to Section 15(a) of the Securities Exchange Act of 1934,
- private funds that are advised by an exempt reporting adviser that relies on the private fund adviser exemption from registration under the Advisers Act, and
- accounting firms, public utilities, and financial market utilities.
Additionally, large operating companies may also be exempt from reporting. To qualify for this exemption, the company must have at least 20 full-time employees in the United States, an operating presence at a physical office in the U.S. (excluding residences or shared spaces, except those shared with affiliates), and have filed a tax return in the previous year indicating more than $5 million in U.S.-sourced gross receipts or sales.
Wholly-owned subsidiaries of exempt entities are also exempt from reporting. Accordingly, if a company is wholly-owned directly or indirectly by one or more exempt parent entities, then the report for that company should list the name of the exempt entity as the beneficial owner, and such report should not include any information concerning the beneficial owners, directly or indirectly, in the exempt entity. Similarly, if a company that is required to report has, among its beneficial owners, a beneficial owner that is an exempt entity, then the reporting for that company should not include any information concerning the beneficial owners, directly or indirectly, in such exempt entity.
What Information is Required to be Reported?
To comply with FinCEN regulations, reporting companies must submit a report containing the following details about their “beneficial owners”, as defined below:
- Full legal name
- Date of birth
- Current residential or business address
- Unique identifying number and issuing jurisdiction from a valid identification document (along with an image of the document), like a passport or driver’s license.
For reporting companies that were formed or registered on or after January 1, 2024, the report must also include the above information for “company applicants,” as defined below.
Who are Beneficial Owners?
A “beneficial owner” is defined as an individual who, either directly or indirectly, exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company. “Ownership interests” includes equity interests in the reporting company, as well as capital or profit interests, convertible instruments, warrants or rights or other options or privileges to acquire equity, capital, or other interests in a reporting company. Any debt instrument is also deemed to be an “ownership interest” to the extent it enables the holder to exercise the same rights as one of the specified equity or other interests in the definition of “ownership interests.”
“Substantial control” is exercised by an individual over a reporting company if the individual:
- Serves as a senior officer (except for corporate secretary or treasurer),
- Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body),
- Directs, determines, or has substantial influence over important decisions made by the reporting company, or
- Has any other form of substantial control over the reporting company, including as a trustee of a trust.
Five exclusions from the definition of a beneficial owner include:
- Minor children, if the child’s parent’s or guardian’s information is reported properly
- Individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual
- An individual acting solely as an employee who is not a senior officer
- An individual whose interest in an entity is only through a right of inheritance
- Certain creditors
When determining whether an individual owns or controls 25% or more of the ownership interests, it is important to remember that ownership interests include all forms of equity, stock, capital or profits, interests, convertible instruments, warrants, rights, options, or privileges to acquire equity. The individual’s ownership interests should be aggregated and compared to the “undiluted ownership interests” of the reporting company. If any interests are outstanding – such as options or profits – they are deemed to be exercised and “in the money” for purposes of the 25% ownership test. Thus, if an individual holds an option for a 25% profit interest in an entity, but the option has not yet been exercised, the individual is still considered as having a 25% ownership interest. If there is more than one class of equity interests outstanding, the 25% threshold is determined as a percentage of all outstanding interests if possible, but, failing that, more than 25% of any class of equity interests triggers the reporting requirement.
An individual may directly or indirectly own or control an ownership interest of a reporting company through a variety of means, including through joint ownership with one or more other persons of an undivided interest in an ownership interest or control of such ownership interest owned by another individual. Furthermore, an individual owning or controlling an interest in one or more intermediary entities that separately or collectively own or control interests in a reporting company is considered to own the interest in the reporting company. Consequently, the same ownership interests could be considered owned or controlled by multiple individuals. For example, where Individuals A and B each own 25% of X Corporation that, in turn, owns 100% of Y Corporation, both A and B own the same interest in Y through their ownership of X.
Additionally, an individual may own or control an ownership interest through a trust or similar arrangement, such as by acting as a trustee of the trust or being a beneficiary of the trust who is the sole permissible recipient of income and principal from the trust, or has the right to demand a distribution of or withdraw substantially all of the assets from the trust.
“Company applicants” are limited to two persons: the individual who directly files the document to create or register the reporting company, and/or the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing. For example, if an attorney oversees the preparation and filing of incorporation documents and a paralegal files them, the reporting company would report both the attorney and paralegal as company applicants.
When do I Need to Report?
The deadline for filing initial beneficial ownership reports with FinCEN differs based on the date of creation or registration of the reporting company. For reporting companies created or registered prior to January 1, 2024, the deadline is January 1, 2025. However, for reporting companies created or registered on or after January 1, 2024, the deadline is within 30 days of formation or registration.
If any information previously reported to FinCEN changes, including changes regarding who is a beneficial owner or the information reported for a particular beneficial owner, the reporting company must submit an updated report within 30 calendar days of the change.
How to Report
FinCEN is in the process of creating the Beneficial Ownership Secure System (BOSS) to enable electronic submission of reports through a secure online interface. BOSS will meet the highest information security protection level under the CTA. In addition, FinCEN plans to issue further regulations specifying who can access information in BOSS and outlining the safeguards necessary to ensure its security and protection.
To aid companies in fulfilling their obligations under the CTA, FinCEN will publish reporting forms and guidance documents ahead of the reporting deadline.
Who has Access to the Information?
Under the CTA, FinCEN is authorized to share beneficial ownership information with certain entities, including U.S. government agencies, certain foreign agencies and authorized persons, and financial institutions for certain Know Your Customer (“KYC”) purposes. However, the information submitted to FinCEN under the reporting rule is not available to the public and is not subject to Freedom of Information Act requests.
Under the Proposed Access Rule, three types of U.S. government agencies may access beneficial ownership information directly from FinCEN’s database: federal agencies engaged in national security, intelligence, and law enforcement activity (both civil and criminal), Department of Treasury officials and employees for their official duties (including tax administration), and state, local, and tribal law enforcement agencies for criminal or civil investigations. Federal agencies must provide a brief justification for their request, while state, local, and tribal agencies must provide a court document authorizing access.
Foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities do not have direct access to FinCEN’s beneficial ownership information database. These authorized foreign entities must request assistance from a U.S. federal agency to act as an intermediary to retrieve the beneficial ownership information from FinCEN’s database. The federal agency may only provide beneficial ownership information to a foreign entity if there is an applicable treaty (or similar international agreement) and the foreign entity limits the use of the beneficial ownership information consistent with that treaty or agreement.
FinCEN may disclose beneficial ownership information to financial institutions to assist with AML compliance only with the reporting company’s consent. FinCEN will also provide reporting forms and guidance documents in advance to help companies comply with their CTA obligations.
Failure to Report
Those who violate the CTA, including companies and individuals, may face civil penalties of up to $500 per day, with a maximum cap of $10,000. Individuals who willfully provide false information or fail to report may face imprisonment of up to two years. Beneficial owners and senior officers of the reporting company can also be held accountable for any violations.
Starting in 2024, certain entities formed or registered to operate in the United States must disclose information that identifies those who establish and ultimately own or control the entity. The reporting rules are designed to prevent financial crimes, including money laundering, corruption, and tax evasion. Although there are numerous exemptions from the reporting requirements, several domestic and foreign commercial groups with U.S. subsidiaries, private funds, pooled investment vehicles, trusts, and other entities will need to evaluate their specific circumstances to determine whether they meet any exemption criteria under the reporting rules. Large operating companies and publicly traded or regulated companies may likely meet one or more of the exemptions listed, but are advised to review the complete final rule at https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements.
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