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On January 1, 2021, Congress passed the National Defense Authorization Act (“NDAA”) [1]. While these NDAAs are routinely passed to fund our military, this version contained a surprise for small business owners across the US. Title 64 of the NDAA contains the newly enacted Corporate Transparency Act. The avowed purpose of the Corporate Transparency Act (“CTA”) is to stop money launderers and in order to affect that goal, the CTA creates a reporting requirement for small companies and limited liability companies to report to Treasury’s Financial Crimes Enforcement Network (“FinCEN”) information about the beneficial owners of the estimated 2 million small businesses across the US. A majority of these entities were previously unregulated.
Who? Who must report this information? After exempting publicly traded companies, investment companies operated by investment advisors, public utilities, non-profits, government entities, banks, domestic credit unions, insurance companies, securities issuers, money transmitting entities, registered investment advisors, large operating companies [2], and subsidiaries of the exempted companies, the CTA applies to private corporations and limited liability companies organized under their local state authorities and foreign entities registered to do business in the United States. While limited partnerships are not mentioned in the CTA, we expect that any company who registers to do business in a state, unless exempted, will have to report.
What? What information must be reported? Information about the reporting company, including full name, all DBAs, address, jurisdiction of formation or registration and their TIN. Information about the beneficial owner of the business. A beneficial owner is defined as an individual who exercises substantial control of the entity or owns not less than 25% of the equity of the entity. Exempted from the definition are those individuals whose control of the entity is solely controlled by an employment relationship, or an owner as a result of an inheritance or a minor or a creditor unless the creditor also has substantial control of the entity. The Proposed Regulations further define substantial control as an individual who serves as a senior officer of the entity (CEO, CFO, COO and GC) or has the authority to appoint or remove a senior officer of the entity, or whose direction or decisions have a substantial influence over important matters of the entity such as buying, leasing or selling property, major expenditures or investments or entry or termination of significant contracts.
The report on the beneficial owner includes the owner’s name, date of birth, residential or business address and a photo identification from a valid driver’s license, passport or other government issued identification. The Proposed Rules expand the last requirement to include an EIN, TIN or DUNS identifying number. The Act dictates that FinCEN will be responsible for the secure storage of this reported information. The reported information will not be publicly available; however, upon request, the FinCEN will provide the information to federal or state law enforcement agencies, to a foreign government if allowed by an international agreement or to a financial institution for due diligence purposes. FinCEN has proposed a rulemaking that contains all the information (fields on the form) that must be reported. You can access this proposed rulemaking at https://www.federalregister.gov/documents/2023/01/17/2023-00703/agency-information-collection-activities-proposed-collection-comment-request-beneficial-ownership
When? When must this report be filed with the FinCEN? New entities are required to file their first report with the FinCEN effective January 1, 2024, and thereafter at the time of the entities’ creation and within 1 year of any change to its beneficial ownership. Existing entities are required to file their report effective January 1, 2025, and within 1 year of any change to its beneficial ownership. There are penalties for noncompliance or misuse of beneficial ownership: civil and criminal penalties for willful reporting violations including fines of up to $10,000 and imprisonment for not more than two years; and civil and criminal penalties for unauthorized disclosure and use of beneficial information.
How to Prepare? In order to prepare for the implementation of the act, we recommend that you first, review your corporate structure, second, create a list of beneficial owners with their relevant contact information, third, stay up to date on the implementation of the law and you can do this by contacting a business attorney, fourth, make sure key leaders know what disclosures are being made and when they are made.
Conclusion: The CTA imposes new reporting requirements for the majority of small businesses across the country. Those businesses that are affected must report specific information about the beneficial owners of the business within the time frames of the CTA and its corresponding regulations.
[1] 116 PL 283
[2] Employ more than 20 employees, reported more than $5 M of gross receipts on a tax return and have a domestic US presence.
This article is for informational purposes only and should not be considered legal advice. Each situation is different, could change any time, and should be analyzed by an attorney.
Joe Garza is an attorney with significant in-house counsel experience who is passionate about representing businesses. He can be reached at 817-602-5815 or jgarza@fultonjeang.com.
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