Generally, businesses have been able to organize and operate without needing to disclose their ownership or management which encouraged formation and investment in businesses in the US. On January 1, 2021 Congress passed the National Defense Authorization Act, which included the Corporate Transparency Act (“CTA”). This is a law we should all pay attention to.
The CTA requirements:
- The CTA will require a reporting company to disclose its beneficial owners to the United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to help law enforcement in the fight against money laundering and the use of shell companies to perpetrate fraud.
- “Reporting companies” include corporations, LLCs, limited partnerships and any other entity which is created by filing a document with a Secretary of State’s office.
- “Beneficial Owners” are individuals who, directly or indirectly, through any contract or arrangement, either
- exercise substantial control over the company; or
- own or control at least 25% of the ownership interests of the company.
- Reporting companies must disclose each beneficial owner’s (i) name; (ii) date of birth; (iii) current address; and (iv) a unique identification number from an acceptable document (a non-expired passport, driver’s license, or an issued FinCEN number).
- Exclusions from “Beneficial Owners” called “exempt owners” are (i) minors; (ii) individuals acting as a custodian agent or solely as an employee; (iii) individuals whose only interest is a right to inheritance; and (iv) creditors.
- If a reporting company has an “exempt (excluded) owner”, it must report the name of the “exempt owner” but such person does not need to provide any additional information.
- There are 24 categories of exempt entities who do not need to submit a “Beneficial Owner” report to FinCEN because they are already heavily regulated and deemed to be of lower risk for use in criminal activity. These include publicly traded companies, governmental entities, banks, credit unions, securities broker/dealers, other SEC regulated entities, investment advisors and investment companies, insurance companies, public accounting firms, subsidiaries of exempt entities, charities and “grandfathered private businesses.”
- “Grandfathered Private Businesses” are those
- with more than 20 full time U.S. based employees (W-2),
- who filed a federal income tax return in the previous year showing more than $5 million in annual gross receipts; AND
- with a “physical office” in the U.S (a location where company business is transacted rather than simply an address).
- Further, the applicant who submits the information on behalf of the reporting company or exempt entity must also provide his/her identity information, for example a lawyer on behalf of a client, or an officer/director for a company.
- Compliance with the CTA depends on when a company was formed:
- For companies existing before the date FinCEN publishes the final regulations, reporting shall be completed in a timely manner, and no later than two (2) years after the effective date of the regulations.
- For an entity formed after the FinCEN regulations are finalized, the report must be filed at the time of formation.
- Additionally, for any company (new or existing) any changes in beneficial ownership information that occur after the initial reporting must be provided to FinCEN within one (1) year of the change.
- Refusing to comply with the CTA could result in significant civil and criminal penalties, such as a fine of up to $500 for each day the violation continues and a total fine of up to $10,000 and imprisonment for up to 2 years, or both.
- For unauthorized disclosures or use violations ( leaks or hacking), there can be a penalty of up to $500 per day for each day the violation continues, and a fine up to $250,000, or imprisonment for up to 5 years, or both.
- Penalties can apply for knowingly providing false or fraudulent beneficial owner information, or willingly failing to provide complete or updated information.
- Secretary of State offices may implement their own updated procedures for entity formation based on the Treasury’s guidance, however, we have not seen those changes yet.
- When do you need to comply?: The CTA becomes effective on the same date that FinCEN’s final regulations are published, and that date was not supposed to be later than January 1, 2022. However, the final regulations have NOT been issued yet.
Please keep these proposed regulations in mind as you work on the structure of your companies because more disclosure is coming, it is just a question of when. You should consider whether your company will be able to qualify as a “Grandfathered Private Businesses”.
If you would like to discuss or have more information, please contact us. We will publish an update as soon as the regulations are published.
As always, the team at Boodell & Domanskis, LLC is available to advise and counsel you during these challenging times. Visit www.boodlaw.com for a directory of attorney contact information.