On January 1, 2021, the Corporate Transparency Act (the “CTA”) was enacted as a part of the National Defense Authorization Act. As a result, certain U.S. business entities will soon be required to file a report with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to disclose identifying information of their beneficial owners.

An estimated two million corporations, limited liability companies (“LLCs”), and other types of business entities are formed under state law in the United States each year. While the overwhelming majority are legitimate businesses pursuing lawful activities, there unfortunately are many “malign actors” who seek to conceal their ownership of business entities for the purpose of facilitating illegal activity. The reporting requirements under the CTA are expected to help protect national security interests, interstate and foreign commerce, and counter the financing of terrorism.

While the objectives of this new law are admirable, you may be left wondering how this will affect your small business. Here are a few key provisions of the CTA that you should be aware of:

Who is a reporting company?

The CTA defines a “reporting company” as a corporation, LLC, or other similar entity created by filing a document with a secretary of state or similar state office under state law. Each reporting company must disclose certain identifying information related to its beneficial owners.

What information must be reported?

Reporting companies must list each beneficial owner’s full legal name, date of birth, current residential or business street address, and unique identifying number (e.g., passport, license, or FinCEN identifier).

Who is a beneficial owner?

A beneficial owner is an individual who directly or indirectly (i) exercises substantial control over the reporting company or (ii) owns or controls not less than 25% of the ownership interests of the reporting company.

Who is exempted?

The reporting requirement is limited by exemptions that include the following:

  1. Companies that issue securities under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), or that are required to file supplementary and period information under Section 15(d) of the Exchange Act;
  2. Entities established under the law of the United States, a Native American tribe, a state, or a political subdivision of a state, or under an interstate compact between two or more states that are designated to exercise governmental authority on behalf of such governments;
  3. Banks, federal or state credit unions, bank holding companies;
  4. Money transmitting businesses registered with the Secretary of the Treasury;
  5. Brokers or dealers as defined in Section 3 of the Exchange Act;
  6. An exchange or clearing agency, as defined in Section 3 of the Exchange Act, that is registered under Section 6 or 17A of the Exchange Act;
  7. Any other entity not otherwise described that is registered with the SEC under the Exchange Act;
  8. An entity that is an investment company or investment adviser properly registered with the SEC;
  9. An investment adviser described in Section 203(I) of the Investment Advisers Act of 1940 (the “Investment Act”) that has filed designated schedules with the SEC;
  10. An insurance company as defined in Section 2 of the Investment Act;
  11. An entity that is an insurance producer authorized by a state and subject to supervision by the state insurance commissioner or similar official and has an operating presence and physical office in the United States;
  12. A registered entity or various other specified entities under the Commodity Exchange Act;
  13. A public accounting firm registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002;
  14. A public utility;
  15. A financial market utility;
  16. Any pooled investment vehicle operated or advised by a bank, credit union, broker/dealer, entities acting as an investment company or investment adviser, or an investment adviser;
  17. Any of the following—
    1. An organization described in Section 501(c) of the Internal Revenue Code (the “Code”) without regard to Section 508(a) of the Code, and exempt from tax under Section 501(a) of the Code;
    2. A political organization under Section 527(e)(1) of the Code that is exempt from tax under 527(a) of the Code;
    3. A trust described in section 4947(a)(1) or (2) of the Code;
  18. Any entity that (i) employs more than 20 full-time employees, (ii) has filed a federal income tax return reporting gross receipts exceeding $5 million, and (iii) has an operating presence in the United States;
  19. Any corporation, LLC, or similar entity that is owned or controlled, directly or indirectly, by certain entities described above; and
  20. A corporation, limited liability company or other similar entity: (i) in existence for over one year; (ii) that has not engaged in active business; (iii) that is not owned, directly or indirectly, by a foreign person; (iv) that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000; and (v) that does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company or other similar entity.

What happens if I don’t report?

There are civil and criminal penalties for the willful failure to provide accurate beneficial owner information. Any person who willfully fails to provide accurate beneficial owner information (or fails to report such information at all) may be subject to civil penalties of up to $500 per day for every day the violation continues. In addition, a person may also be subject to criminal penalties that include a fine of up to $10,000, up to 2 years imprisonment, or both.

Thankfully, there is a safe harbor that allows an individual to avoid these penalties if she voluntarily submits corrected information within 90 days after the date of submission unless the person knowingly filed false beneficial owner information with the intent of evading the reporting requirements.

When Will I Have to Start Reporting?

The Treasury must issue regulations regarding the CTA by January 1, 2022. Upon the effective date of the regulations, the beneficial reporting requirements will also be effective. Reporting companies that exist at such time must file their reports within 2 years of the effective date of the regulations. And reporting companies formed after the effective date of the regulations must file the report upon the formation of the entity.

All reporting companies must file a report within one year of the beneficial ownership information changing. Changes that trigger this reporting requirement include (i) a change in substantial control of the reporting company, (ii) a change in contact details for a beneficial owner or applicant, and (iii) beneficial ownership exceeding or dropping below 25%.

Things We Don’t Know at This Time

Prior to the adoption of the implementing regulations, there are many questions we simply cannot address and must wait for the regulations. For example, we do not know exactly where and how the filing will be made. Perhaps the filings will be made electronically directly to FinCEN or at the state level. These and other details will be fleshed out in the regulations.  Stay tuned for further updates.

Please do not hesitate to reach out if we can be of assistance to you or your small business or nonprofit organization. Email or call Eric Perkins at [email protected] or (804) 205-5162.

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