In early 2021, Congress passed the Corporate Transparency Act (the “CTA”) as part of the 2021 National Defense Authorization Act. Subject to some exceptions, the CTA requires all qualifying “reporting companies” formed in or registered to do business in the United States to report and disclose certain information about each of its “beneficial owners” to the Financial Crimes Enforcement Network (“FinCEN”). For decades, small businesses have been identified by law enforcement and Congress as vehicles used by criminals to commit a wide variety of crimes, including tax evasion and money-laundering. The requirements contained in the CTA are intended to discourage the organization of “shell” companies to reduce illegal money-laundering activities and increase the transparency of businesses operating in the United States by requiring small businesses to register with FinCEN.

The reporting requirements imposed by the CTA will not become law until the date on which corresponding regulations are drafted and adopted by the Treasury Secretary, but under the CTA, those regulations must be promulgated by no later than January 1, 2022. The regulations are intended to provide more details regarding how reporting companies must comply with these new reporting requirements under CTA.

These requirements will include most small business that are already organized as well as newly organized businesses after the promulgation of the regulations implementing the CTA’s provisions, including, for example, small mom-and-pop entities, real estate or investment holding entities (even if those entities have only one owner), and even larger corporations, unless the appliable entity qualifies for certain defined exceptions.

Applicability of the CTA

Under the CTA, the term “reporting company” includes corporations, limited liability companies, or similar entities (a) created by the filing of a document with the secretary of state or similar office under the laws of any US state, or (b) formed under the laws of a foreign country and registered to do business in the US. However, not all companies will be required to report under the CTA. For example, the CTA provides that more than twenty types of businesses are excluded from the reporting requirements. Business entities that will be exempt from the reporting requirements include businesses that employ more than 20 employees on a full-time basis, businesses that report revenues of more than $5 million on their tax returns and are physically located within the US, certain types of financial institutions that report to government agencies like the SUC and FDIC (like credit unions, banks, public accounting firms and investment firms), and non-profit organizations (like charities and churches).

Beneficial Owners

Under the CTA, a “beneficial owner” is defined as any entity or individual who directly or indirectly (through contract, arrangement, understanding, relationship or otherwise) (a) exercises “substantial control” over the entity, or (b) owns or controls not less than 25% of the “ownership interests” of the company. These terms will be further defined and clarified in the regulations. Notably, a beneficial owner under the CTA will not include certain categories of owners like individuals who have inherited an ownership interest in a company, a minor who might receive or own an interest in a company, and individuals who only act on behalf of another individual as a trustee, custodian or agent.

Requirements for Reporting under the CTA

Reporting companies will have to provide the following information about each beneficial owner to FinCEN on an annual basis:

• a. Each Beneficial Owner’s full legal name;
• b. Each Beneficial Owner’s date of birth;
• c. The current home or business address for each Beneficial Owner; and
• d. A unique identifying number from an acceptable identification document (i.e., a non-expired US issued passport or Stat issued driver’s license) or a FinCEN identification number.

FinCEN must establish a registry and prescribe regulations governing how the beneficial ownership information will be collected and maintained by January 1, 2022. The effective date of the regulations providing the reporting requirements will determine the filing deadlines for reporting companies. However, we do know that any companies formed prior to the effective date of the CTA reporting requirements will have two years to comply with the reporting requirements and companied formed AFTER the effective date of the CTA reporting requirements must report the required beneficial owner information at the time of formation of the entity. Additionally, if there are any changes to the information reported to FinCEN, the reporting company must update that information within one year of the change.

Access to FinCEN Database Information

The CTA indicates that security protocols must be implemented in order to protect the confidentiality of the information collected on beneficial owners. Once the beneficial ownership information is collected, the database will have limited access meaning that not everyone will be entitled to review or obtain information contained in the database. Instead, FinCEN is only permitted to disclose beneficial ownership information to other government and financial institutions for national security, intelligence, and law enforcement purposes. FinCEN will be prohibited from disclosing or providing access to beneficial ownership information to others, including the general public.

Penalties for Failures to Report

Failures to comply with the new reporting requirements contained in the CTA or the provision of false or fraudulent information will result in significant penalties, including potential fines and criminal prosecution. The CTA provides that violations could result in civil penalties of up to $500 for each day the violation continues and, if any individual willfully provides or attempts to provide false or fraudulent information or willfully fails to provide FinCEN with the required information, criminal fines up to $10,000 and/or imprisonment for up to two years.

Practical Next Steps for Companies

Knowing that the CTA regulations must be promulgated by January 1, 2022, all companies that will have a reporting requirement under the CTA should (a) begin collecting required beneficial ownership information, (b) review regulations promulgated to implement the CTA and consider possible revisions to governing documents (like Operating Agreements for LLCs and Bylaws for corporations) to require applicable beneficial owners to disclose the required reporting information to the company, including any future changes to such information, and (c) consider implementing a CTA compliance plan for meeting the ongoing CTA reporting requirements.

Identifying companies that must report beneficial ownership information to FinCEN, identifying beneficial owners to gather required reporting information, and keeping FinCEN information up-to-date, will be new essential organizational and business maintenance obligations for many companies beginning in 2022.

CCHA Business Services attorneys will continue to review the CTA regulations once they become available and are ready to assist business owners in understanding what beneficial ownership information needs to be collected and how to properly report it under the CTA. If you have any questions or would like assistance in revising your corporate documents to reflect the changes implemented by the CTA, please contact CCHA or attorney Steve Lutz and let us help.