Corporate Transparency Act

What Companies Need to Know

On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act. The purpose of the CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by creating a national registry of beneficial ownership information for “reporting companies.” The CTA largely applies to foreign-owned shell companies and is set to take effect no later than January 1, 2022—upon the promulgation of regulations by the secretary of the US Department of the Treasury (Treasury).

While the Corporate Transparency Act largely applies to foreign-owned shell companies, domestic companies should carefully read the definition of “reporting company” to ensure they fall within one of the exceptions to the definition. Reporting companies should be mindful of the various penalties associated with noncompliance or providing inaccurate or misleading information to FinCEN.

The new law requires “reporting companies” to disclose the identities of their “beneficial owners” and “applicants” to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). A reporting company is broadly defined as any corporation, limited liability company, or other similar entity established in any U.S. state or territory or foreign company registered to do business in the U.S. Although the CTA excludes numerous categories of companies, exempt companies, which include public companies, banks, and investment companies, and other highly regulated industries and already subject to reporting requirements of other federal agencies.

A beneficial owner is defined as any individual who, directly or indirectly: (1) exercises substantial control over the reporting company or (2) owns or controls at least 25 percent of the reporting company. Individuals excluded from this definition include minors (provided parental information is reported) and nominees, intermediaries, custodians, or agents acting on behalf of another individual. An applicant is defined as any individual who files an application to form or register the reporting company.

Reporting companies will be required to submit a report to FinCEN disclosing the name, date of birth, current address, and unique identification number (from a passport or driver’s license) of each of their beneficial owners and applicants.

Companies subject to the CTA should take note of filing deadlines to avoid penalties and fines. Companies formed or registered after the FinCEN regulations go into effect must submit reports at the time of formation or registration. By contrast, existing companies must submit reports within two years after the effective date of these regulations. Additionally, upon a change in any beneficial owner information, reporting companies will be required to update this information with FinCEN no later than one year after such change.

Corporate Transparency Act

Who is Required to Report Beneficial Ownership Information?

Under the CTA, a “reporting company” must report certain beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) within the Treasury. 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.

While the definition of “reporting company” is broad, there are a whole host of exceptions to the definition. Such exceptions include, but are not limited to, public companies; non-foreign-owned shell companies; financial institutions (such as banks, credit unions, brokers, dealers, and exchange and clearing agencies); investment companies; insurance companies operating within the United States; public utility companies; accounting firms; pooled investment vehicles; nonprofit and political organizations; and entities that employ more than 20 employees, filed federal tax returns demonstrating more than $5 million in gross receipts or sales, and have an operating presence within the United States.

While the CTA largely applies to foreign-owned shell companies, domestic companies should nevertheless carefully read the definition of “reporting company” to ensure they fall within one of the exceptions to the definition.

Penalties have been established under the CTA for those who fail to comply with the reporting requirements. Any person who willfully provides false beneficial ownership information or fails to file complete or updated reports with FinCEN can face a civil penalty of up to $500 for each day that the violation continues and a fine of up to $10,000 and/or imprisonment for up to two years.

FinCEN will maintain beneficial ownership information relating to each reporting company for at least five years after the company is dissolved. While beneficial ownership information is non-public and confidential, FinCEN may disclose this information to other federal agencies and law enforcement agencies on the federal, state, and local levels under certain circumstances. The CTA also prohibits an entity organized under state law from issuing bearer shares.

The Department of Treasury has the remainder of the year to iron out the particulars for implementing the CTA and provide clarity with its forthcoming regulations, which must be promulgated no later than January 1, 2022. CTA becomes effective 1 January 2022. Businesses formed after that time must submit reports within two years. All business changes are required to be reported within one year.

Businesses should add beneficial owner information collection into their operations especially when there are multiple qualifying beneficial owners, as reporting/update deadlines can be cumbersome. Failure to report or update beneficial owner information may include civil penalties up to $500 per day until the violation is corrected as well as criminal fines up to $10,000 and imprisonment for up to two years.

While the Corporate Transparency Act largely applies to foreign-owned shell companies, domestic companies should carefully read the definition of “reporting company” to ensure they fall within one of the exceptions to the definition. Reporting companies should be mindful of the various penalties associated with noncompliance or providing inaccurate or misleading information to FinCEN.

The good news is that business entities have almost a full year to get their CTA reporting controls in place, to meet the 1 January 2022 effective date.

Beyer, Pongratz, and Rosen is closely monitoring developments of the CTA, and our lawyers are ready and available to assist businesses of all sizes and at all stages of their life cycles.

The attorneys with Beyer, Pongratz, and Rosen have vast experience with every aspect of estate planning, probate, and business structuring. We are here to help! Give us a call to get started 916-369-9750 or contact us online to set up a FREE consultation. We look forward to working with you.

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