What is the Corporate Transparency Act?
Many small and mid-size businesses in the US will soon become required to report their ownership information to the federal government, under the Corporate Transparency Act (CTA), which became law on January 1, 2021. The purposes of the CTA are primarily directed towards national security and anti-money laundering efforts, but the act applies very broadly and hits small businesses in particular. Unless there is a relevant exemption, every corporation and limited liability company registered to do business in the US must file reports with the Financial Crimes Enforcement Network (FinCen) of the Treasury Department. These reports must identify all beneficial owners – any individual directly or indirectly controlling the company or owning 25% or more of the company – as well as applicants. An applicant is any person who files an application to form a company – basically the incorporator of the business.
Who is a “beneficial owner?”
A beneficial owner is any person who, directly or directly, through any contract, understanding, relationship, or otherwise, exercises substantial control over the entity, or owns or controls 25% or more of the ownership interests of the entity. If the beneficial owner is another company, rather than a person, it will have to report similar details about its ownership.
The company will have to identify each beneficial owner and applicant and provide each individual’s full legal name, date of birth, current home or business address, and a “unique identifying number from an acceptable identification document” (such as a current passport, driver’s license, or state ID).
What companies are exempt from the Corporate Transparency Act?
The following companies are exempt from these reporting requirements:
- public companies,
- banks and bank holding companies,
- credit unions,
- registered investment companies,
- registered investment advisors,
- insurance companies,
- registered public accounting firms,
- public utilities,
- 501(c) entities
- Companies with more than 20 full-time employees in the US, more than $5 million in gross receipts or sales, and an operating presence at a physical office in the US, and
- Any entity owned or controlled by one of those exempt entities.
When does reporting start for the Corporate Transparency Act?
The Treasury Department must develop and publish implementing regulations within the next year, and once those are finalized, companies will be required to start filing the ownership reports. Companies in existence before the effective date of the regulations will have 2 years to file their initial reports. Companies formed after the effective date of the regulations will have to file reports when they are incorporated. Companies are also required to report changes in beneficial ownership within 1 year of the change, although regulations could require a shorter reporting time-frame.
The information that companies file will not be available to the general public, but can be made available to federal agencies for national security, intelligence, or law enforcement purposes, or to law enforcement agencies upon court authorization, and, with customer consent, to financial institutions to the extent necessary to fulfill their know-your-customer obligations.
The CTA authorizes civil and criminal penalties for willfully filing false or fraudulent information, or for willfully failing to report complete or updated information.
We will monitor developments, and let you know when the reporting requirements take effect.