Congress passed the Corporate Transparency Act (CTA) on January 1, 2021, which will require certain small businesses to identify and disclose information about their owners. The purpose of the law is to help stop money laundering by inhibiting the abuse of shell companies used by drug dealers and other bad actors.
REQUIREMENTS OF THE CORPORATE TRANSPARENCY ACT
Under the CTA, which is expected to take effect in 2022 or early 2023, each corporation or limited liability company formed under the laws of any state is required to file a report with the Financial Crimes Enforcement Network (FinCEN), containing a list of the beneficial owners of the corporation or limited liability company. For each beneficial owner, the applicant will have to disclose the following information:
- full legal name
- date of birth
- current residential or business street address; and
- a unique identifying number from a non-expired passport issued by the United States, a non-expired personal identification card, or a non-expired driver’s license issued by a State.
This information will be required to be updated on an annual basis.
WHAT IS A ‘REPORTING COMPANY”?
Any legal entity that is formed through the filing in a state secretary of state’s office is potentially a reporting company. This includes but is not limited to corporations, LLCs, most partnerships and certain trusts.
The CTA provides 23 exemptions from the definition of a reporting company, generally larger companies, or entities that are already subject to significant state or federal regulation.
EXEMPTIONS FROM THE CTA
Importantly, the CTA exempts a number of businesses from its disclosure requirements, mostly larger companies and companies in heavily regulated industries and, specifically, including:
- any business that employs more than 20 full-time employees in the U.S., has revenues in excess of $5 million and has a physical presence in the U.S. (not a residence or a shared space)
- non-profit organizations
- financial institutions such as banks and credit unions, and investment advisors
- insurance companies and public accounting firms; and
- publicly traded companies
WHEN WILL THE FIRST REPORTS BECOME DUE:
Once the regulations take effect (which is expected at the end of 2022 or early 2023) reporting companies will have one (1) year to make their initial report to FinCen.
Entities formed on or after the regulations effective date will only have 30 days to make their first report.
Any change to the reported data must be reported within 30 days of the change.
WHO IS A “BENEFICIAL OWNER”
The CTA defines a “beneficial owner” of a corporation or a limited liability company as any “natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:”
- exercises substantial control over a corporation or limited liability company;
- owns 25 percent or more of the equity interests of a corporation or limited liability company; or
- received substantial economic benefits from the assets of a corporation or limited liability company.
Proposed regulations take an expansive view “ownership interest” includes equity interests, capital or profits interest, convertible instruments, warrants or rights.
There are a few exemptions to who constitutes a beneficial owner, including: a minor child, a person acting as an agent on behalf of someone else, a person acting solely as an employee of the company, a person whose interest in the company is through inheritance, or a creditor of the company.
WHO IS THE COMPANY APPLICANT?
A Company Applicant is defined as an individual who files a document that creates a domestic reporting company or who first registers a foreign reporting company. The proposed regulations specify that a Company Applicant includes anyone who directs or controls the filing of the document by another. The Company Applicant is also required to provide the information set forth above.
NON COMPLIANCE
Certain violations of the CTA may result in the imposition of civil and criminal liability, including civil fines of $500 / day, criminal fines up to $250,000 and up to 5 years in prison.
WHO MAY ACCESS THE DATA
Federal law enforcement, intelligence agencies and regulators, including the IRS, will be able to access the data without a court order. State law enforcement agencies will need to obtain a court order.
If you have any questions regarding the Corporate Transparency Act please contact Randolph M. Wright in the firm’s Birmingham office at 248-645-2513 or by e-mail: rwright@berrymoorman.com.
