As businesses prepare for the year ahead, that planning should include analysis of compliance with the Corporate Transparency Act (CTA). The coverage of the CTA is very broad and requires certain business entities to submit a report to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Although there are exemptions, those exemptions essentially apply to entities that already have fairly extensive reporting requirements (i.e., banks or large companies), which means that smaller companies not currently subject to such reporting requirements will likely need to comply with submitting the reports. Although the CTA recently became law, FinCEN must issue regulations to implement the new ownership reporting requirements within one year (by December 31, 2021).
I. Main Rule
The main CTA reporting provision requires each applicant forming a corporation, limited liability company or similar entity to file a report with FinCEN containing a list of the beneficial owners of the corporation, limited liability company or similar entity that identifies each beneficial owner by:
1. full legal name;
2. date of birth;
3. current residential or business street address; and
4. 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.
Furthermore, if the applicant is not a beneficial owner, the report must also provide the identification information described above relating to such applicant.
II. Definitions
The following are some of the definitions in the CTA:
applicant — any natural person who files an application to form a corporation, limited liability company or similar entity under the laws of a State or Indian Tribe.
beneficial owner — means a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise:
1. exercises substantial control over a corporation, limited liability company or similar entity;
2. owns 25 percent or more of the equity interests of a corporation, limited liability company
or similar entity; or
3. receives substantial economic benefits from the assets of a corporation, limited liability
company or similar entity.
III. Timing of Reports
It is anticipated FinCEN’s subsequent regulations will describe in detail the timing of reports; however, based on the CTA, businesses should be aware of the report timeframe for the following:
- Existing Entities — Any reporting company that has been formed or registered before the effective date of FinCEN’s regulations is to submit a report within two years of the effective date of such regulations.
- New Entities — Any reporting company that is formed after the effective date of FinCEN’s regulations will be required to submit a report when formed.
- Annual Reports — Not only must entities make an initial filing, but they must also make an annual filing listing the current beneficial owners and the information required in the initial report as well as any changes in beneficial owners during the previous year.
IV. Exemptions
Not all entities must comply with the reporting requirement as the CTA provides certain exemptions. Those exemptions largely apply to companies that already face existing reporting requirements. However, just because a company meets an exemption does not mean the entity can take no action. The CTA requires an entity claiming an exemption to identify the specific exemption it is claiming, state that the entity meets the requirements for the exemption and provide identification information for the applicant or prospective officer, director or similar agent certifying the above information. There are additional clarifications for the exemptions below, but for brevity’s sake, those have been removed. As such, the listing should be used for purposes of understanding the general nature of the exemptions and not as an authoritative guide for specific requirements of each exemption.
Exemptions exist for an entity that is:
- an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that is required to file reports under section 15(d) of that Act;
- a business concern constituted, sponsored or chartered by a State or Indian Tribe, a political subdivision of a State or Indian Tribe, under an interstate compact between two or more States, by a department or agency of the United States or under the laws of the United States;
- a depository institution;
- a credit union;
- a bank holding company or a savings and loan holding company;
- a registered broker or dealer;
- a registered exchange or clearing agency;
- an investment company or an investment adviser;
- an insurance company;
- a registered entity, or a futures commission merchant, introducing broker, commodity pool operator, or commodity trading advisor;
- a registered public accounting firm or an entity controlling, controlled by, or under common control of such a firm;
- a public utility;
- a church, charity, nonprofit entity, or other organization that is described in section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code of 1986;
- a financial market utility designated by the Financial Stability Oversight Council;
- an insurance producer;
- any pooled investment vehicle that meets certain qualifications;
- any business concern that —
a. employs more than 20 employees on a full-time basis in the United States;
b. files income tax returns in the United States demonstrating more than
$5,000,000 in gross receipts or sales; and
c. has an operating presence at a physical office within the United States; or - subsidiaries of certain qualified entities.
V. Conclusion
Although many businesses will need to file the registration reports required by the CTA, all businesses should determine whether they can claim an exemption or must file a registration report. Although FinCEN still must issue regulations over the next year regarding the CTA, businesses would be well-advised review the CTA now, so they are prepared once the details of the reporting process are finalized.
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