January 10, 2023
By Louann Bronstein, as published by Legal Newswire
The Corporate Transparency Act (CTA) will become effective January 1, 2024. The CTA was enacted on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021. In the interim period, the Department of Treasury (FinCEN) released its proposed regulations, provided a comment period, and then released its final regulations on September 30, 2022.
The CTA is groundbreaking. It creates a national database to register corporations and limited liability companies. Though not specifically mentioned, limited partnerships (including LLPs and LLLPs) will be required to register as well, on the basis that the CTA requires the registration of “other entities created by filing a document with the secretary of state of the relevant state.”
The CTA’s purpose is to target anonymous shell companies to address and prevent money laundering, terrorism funding, tax evasion, and similar illicit financial activities. However, due to the business size component of the CTA, many legitimate small businesses will be required to register.
With some exceptions for highly regulated industries, the CTA requires reporting by any corporation, limited liability company, or filing company unless it satisfies all the following:
- Employs more than 20 employees on a full-time basis in the United States; and
- Filed in the previous year federal income tax returns demonstrating more than $5 million in gross receipts in the aggregate; and
- Owns or leases a physical office in the United States (cannot be a residence or shared office space, beyond being shared with affiliated entities).
The CTA requires that each reporting company identify itself by reporting:
- Its legal name and any alternative names (i.e., trade names or d/b/a)
- Street address of the principal place of business (must be a U.S. address)
- Jurisdiction of formation
- Tax Identification Number (TIN or EIN)
The CTA requires that certain identifying information be reported for each “beneficial owner” of a reporting company. A beneficial owner is any individual who, directly or indirectly:
- Owns or controls 25% or more of the “ownership interests” of the entity; or
- Exercises “substantial control” over the entity; or
- Receives substantial economic benefits from the assets of the entity.
There are three specific indicators of “substantial control”:
- Service as a senior officer of a reporting company
- Authority over the appointment or removal of any officer
- Direction, determination, or substantial influence over important decisions made by the reporting company (e.g., the sale, lease, or transfer of any principal assets of the company; the entry into or termination of significant contracts, major expenditures, and investments by the company and compensation schemes for senior officers)
In addition, a catch-all provision of “any other form of substantial control over the reporting company” is included, to further the goal of requiring a reporting company to identify all the individuals who stand behind the reporting company and direct its actions.
“Ownership interests” include both equity in the reporting company and other forms of interests, including 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. An “ownership interest” would also include any ownership interest by another person that an individual has the ability to control.
Each beneficial owner will be required to report identifying information, including:
- Full legal name
- Date of birth
- Current residential street address (may be outside the United States)
- Unique identifying number, such as a passport, driver’s license, or state issued ID number
There is no exception for existing entities. Entities formed before January 1, 2024, will have one year to file the report. The reporting requirement will be immediate (essentially, within 30 days after formation) for entities formed after January 1, 2024.
The CTA provides significant penalties for failing to file a report or providing false information. These penalties include monetary fines up to $10,000, two years in prison, or both.
The CTA provides safeguards to protect the disclosure of information in the database. The general public will not have access to the database, and the information will not be subject to the Freedom of Information Act. In support of the CTA’s purpose, the information will be available to law enforcement agencies, federal agencies for national security, federal regulatory agencies (such as the IRS), and financial institutions, in each case following strict regulatory protocols.
Louann Bronstein is a partner at HunterMaclean, where she serves as head of the corporate group and specializes in corporate law and mergers & acquisitions. She can be reached at (912)236.0261 or email@example.com
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