UPDATE: The Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury issued the Beneficial Ownership Information Reporting Requirements final rule on September 30, 2022. Please see our recent advisory for more: Corporate Transparency Act’s Reporting Requirements: Is Your Company Prepared?
The Corporate Transparency Act (CTA) was enacted as a part of the National Defense Authorization Act by Congress on January 1, 2021. When it becomes effective, it will mainly apply to small U.S. businesses, requiring certain companies to file a report providing the name, date of birth, current address, and unique identification number (from a passport or driver’s license, for example) of the company’s “beneficial owner(s).” The report will be filed to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Treasury Department. This information must be updated every year to reflect any changes.
The CTA will become effective when the regulations published by the FinCEN go into effect, and that date can be no later than January 1, 2022 (one year after enactment of the CTA). On April 5, 2021, FinCEN published a proposed set of regulations to gather public comments. Since there have been no additional updates from FinCEN regarding the official publication, it is very likely that the regulations will become effective on January 1, 2022, making the CTA effective on the same date.
Timing for Compliance
The CTA will be applicable to companies depending on when the company was formed:
- For entities existing before the date that FinCEN has published final regulations on the CTA, the reporting must be done in a timely manner, and not later than two years after the effective date of the regulations; and
- For entities formed or registered after the FinCEN regulations are effective, the reports must be filed at the time of formation or registration.
Additionally, a reporting company must update the information provided to FinCEN upon a change in beneficial ownership within one year of the change.
For purposes of the CTA, the reporting requirements apply to any company that is a “Reporting Company”. The CTA defines this term as: “a corporation, limited liability company, or other similar entity” that is created by the filing of a document with the state or Indian Tribe, or formed as a foreign entity registered to do business in the United States. The definition explicitly excludes an extensive list of entities (a total of 24 listed). Among those excluded, the most prominent ones include:
- Publicly traded companies (subject to SEC regulations);
- Companies employing more than 20 full-time employees in the United States, operating from a physical office in the United States, AND having filed a tax return demonstrating more than $5 million in gross receipts/sales; and
- Dormant companies which have been in existence for more than one year, are not engaged in “active business,” AND not owned (either directly or indirectly) by a non-U.S. individual.
- Additional exceptions exist for certain financial institutions, charitable trusts, and pooled investment vehicles.
Under the CTA, a “beneficial owner” is an individual who, directly or indirectly (1) exercises substantial control over an entity; or (2) owns or controls at least 25 percent of the ownership interests in an entity.
There are five exceptions from the term “beneficial owner”:
- A minor child, if the child’s parent’s or guardian’s information is otherwise is reported properly;
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
- An individual acting as an employee whose control is derived solely because of employment status;
- An individual whose only interest in the entity is through a right of inheritance; and
- A creditor of the entity, unless the creditor meets the requirements of a beneficial owner.
As the one-year anniversary of the CTA enactment comes closer, it would be important for small business owners or entrepreneurs who are planning on starting new business entities to pay close attention to FinCEN’s publication for the CTA regulations. Varnum will keep a close eye on the issue and would be happy to help any business owners or entrepreneurs regarding compliance.