There are millions of corporations, partnerships and limited liability companies formed in the United States each year, and no good way for law enforcement to find out who owns them. That’s about to change thanks to the Corporate Transparency Act, which was enacted as part of the National Defense Authorization Act for Fiscal Year 2021. Under the CTA, and the final regulations released Sept. 29, 2022, a “Reporting Company” must provide certain identifying information about its 25% owners, those who control substantial decisions of the Reporting Company and certain individuals who helped form or register the Reporting Company (a Company Applicant). Failure to report can result in both civil and criminal penalties. (31 USC Section 5336(h)(3)(A)).
Collection and Use
Reported information will be collected by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This information will be stored in a searchable registry that’s available to federal agencies involved in national security, intelligence or law enforcement. It will also be available to state or local law enforcement agencies with court approval, to financial institutions as part of their KYC/AML functions (with the consent of the Reporting Company) and to U.S. regulators or certain foreign governments subject to certain approvals. (31 USC Sections 5336(c)(2)(B)). The registry won’t be available to the public.
Under the final FinCEN regulations, Reporting Companies created before Jan. 1, 2024 will have one year to file their initial report with FinCEN, while those formed Jan. 1, 2024 and after will need to file an initial report within 30 calendar days. (31 CFR Section 1010.380(a)(1)).
If reported information changes, an updated report must be filed within 30 days of that change (regardless of when the Reporting Company learns of the change). (31 CFR Section 1010.380(a)(2)). There’s also an obligation to file a corrected report no more than 30 days after the Reporting Company knows or has reason to know of an inaccuracy. (31 CFR Section 1010.380(a)(3)).
Who Must Report?
The obligation to report to FinCEN is imposed on Reporting Companies. Under the CTA, a Reporting Company is any entity formed by a filing with a secretary of state or any foreign entity that’s registered to do business in the United States by a filing with a secretary of state. (31 USC Section 5336(a)(11)(A) and 31 CFR Section1010.380(c)(1). While this article speaks in terms of newly formed domestic entities, identical rules apply to foreign entities that register to do business in the United States). As a result, Reporting Companies include corporations, LLCs, limited partnerships and LLPs, but typically don’t include general partnerships, sole proprietorships or trusts because those entities don’t require a filing to be brought into existence.
Both the CTA and the final regulations exclude 23 categories of business from the definition of Reporting Company. (31 CFR Section 1010.380(c)(2)). These excluded companies don’t have to collect or report any information to FinCEN. For the most part, these are businesses that are already highly regulated, and therefore unlikely to be used for criminal purposes. Excluded companies include banks, broker/dealers, insurance companies and public accounting firms registered under Section 102 of the Sarbanes-Oxley Act. It’s worth noting the Large Operating Company exception (31 USC Section 5336(a)(11)(B)(xxi) and 31 CFR Section) 1010.380(c)(2)(xxi), which excludes entities that have more than 20 full time employees in the United States, a physical office in the United States and more than $5 million in U.S. gross receipts.
What Must be Reported?
A Reporting Company must disclose information about itself and two distinct categories of individuals: Company Applicants and Beneficial Owners.
The Reporting Company must disclose its full legal name, any DBAs, a principal business address, the jurisdiction of formation and a taxpayer identification number. (31 CFR Section 1010.380(b)). A Company Applicant is the individual who filed the formation or registration document for the Reporting Company, and the individual “primarily responsible for directing or controlling such filing” if any. (31 CFR Section1010.380(e)). This could be, for example, a paralegal who submits the formation document to the secretary of state and the attorney who asked the paralegal to make that submission. The Company Applicant for entities existing on Jan. 1, 2024 doesn’t need to be disclosed. Thereafter for each Company Applicant, a newly formed entity will need to disclose the name, date of birth, street address, unique identifying number from a passport, driver’s license or other identifying document and a copy of that document. (31 CFR Section 1010.380(b)(1)(ii). See also 31 CFR Section 1010.380(b)(2)(iv). The regulations allow individuals and Reporting Companies to apply for unique FinCEN identifiers that can be supplied instead of the specifically enumerated personal information.) There are two types of Beneficial Owners for purposes of the CTA: those who exercise substantial control over the Reporting Company and those who are 25% owners of the Reporting Company. 31 CFR Section 1010.380(d). In both cases the Reporting Company must report the same information as it does for a Company Applicant, but a residential (not business) address must be provided.
An individual exercises substantial control over a Reporting Company if that individual: (1) serves as a senior officer of the Reporting Company, (2) has authority over the appointment or removal of a senior officer or a majority of the board of directors (or similar body), (3) directs, determines or has substantial influence over important decisions of the Reporting Company, or (4) has any other form of substantial control over the reporting company. (31 CFR Section 1010.380(d)(1)(i)). Substantial control can be direct or indirect. (31 CFR Section 1010.380(d)(1)(ii)).
With regard to ownership, it’s broadly defined to include equity, capital or profit interests, convertible instruments and options. (31 CFR Section 1010.380(d)(2)(i)). Ownership can be direct but also includes various types of indirect ownership. (31 CFR Section 1010.380(d)(2)(ii)). The regulations specify that a trustee who can dispose of trust assets is deemed to own a Reporting Company held in the trust for purposes of the CTA. A beneficiary of a trust is deemed to own a Reporting Company held in the trust if the beneficiary: (1) is the sole income and principal beneficiary, or (2) has the right to withdraw substantially all of the trust assets. A grantor will be considered an owner of a Reporting Company owned by a trust if it’s revocable or if the grantor can otherwise withdraw the trust assets. (31 CFR Section 1010.380(d)(2)(ii)(C)). As a result, trust-owned assets will almost always be deemed owned by the trustee for purposes of determining 25% owners of a Reporting Company, while grantors and beneficiaries may be attributed ownership in more limited circumstances.
Over time, reporting under the CTA will become routine, but it’s incumbent on all of us to spend the next year determining how we will ensure the required reports are made. Will someone in your office become your CTA expert? Do you want to specifically mention this in your engagement letters? Should it be included in a “care and maintenance” memo each time you form an entity? There are many practical questions associated with the CTA, and FinCEN has promised more guidance in the form of FAQs and outreach to stakeholders. One thing is certain, however: Jan. 1, 2024 is just around the corner, and the practice of almost every attorney will be impacted by the CTA.