The Corporate Transparency Act
The National Defense Authorization Act (“NDAA”) was passed by Congress at the end of 2020. Included within the NDAA is what is known as the Corporate Transparency Act (“CTA”) which was enacted into law as of January 1, 2021. However, required compliance with the reporting requirement of the CTA does not begin until January of 2022, which is the deadline for further enabling regulations which will govern the timing for filing reports under the CTA to be promulgated.
Overview of the CTA
What does the CTA aim achieve? – Once fully implemented, the CTA will require new and existing corporations, limited liability companies and similar entities to disclose information about their beneficial owners. Based on its own language, the intent of the act is to prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations and limited liability companies.
Who qualifies as a “beneficial owner”? – According to the CTA, a “beneficial owner” means a person who directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (a) exercises substantial control over the entity or (b) owns or controls not less than 25 percent of the ownership interests of the entity. Further guidance is likely to be set forth with respect to these requirements when the additional regulations are finalized. There are certain exceptions as to who qualifies as a beneficial owner. A few of the notable exceptions as to who does not qualify as a beneficial owner include (i) an individual acting solely as an employee of the reporting company and whose control over or economic benefits from such entity is derived solely from the employment status of the person; (ii) an individual whose interest in a reporting company is through a right of inheritance; (iii) minors; and (iv) creditors.
Reporting Companies – According to the CTA, companies that must abide by the reporting requirements include any corporation, limited liability company, or other similar entity that is either (a) “created by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe” or (b) “formed under the law of a foreign country and registered to do business in the United States by filing of a document with a secretary of state or a similar office under the laws of a State Indian Tribe.”
Requirements for Existing Entities – Any reporting company that has been formed or registered before the effective date of the CTA will be required, in a timely manner, and not later than 2 years after the effective date of the CTA or the additional regulations promulgated by the Secretary of the Treasury, to submit to the Financial Crimes Enforcement Network a report that contains the information required by the CTA.
Requirement for New Entities – Any reporting company that has been formed or registered after the effective date of the CTA will be required to, at the time of formation or registration, submit to the Financial Crimes Enforcement Network a report that contains the information required by the CTA.
Required Information – A report provided to the Financial Crimes Enforcement Network by a reporting company must identify–by full name, date of birth, current residential or business street address, and unique identifying number–each beneficial owner and applicant of the applicable reporting company. An applicant is any individual who files an application to form a reporting company or registers or files an application to register a foreign company to do business in the United States.
Exempted Entities – Under the CTA, there are quite a few exceptions for companies that are considered exempted from the ownership reporting requirements. The general exemption most companies will qualify under is for companies with (a) more than 20 full-time employees in the United States, (b) more than $5 million in gross receipts or sales as reported on the company’s tax returns, and (c) has an operating presence at a physical office in the United States. Certain churches and qualified non-profit organizations that are considered tax exempt under the Internal Revenue Code, insurance companies, certain public utility providers, banks and credit unions, public companies, and other entities also qualify as exempt from the reporting requirements.
If any entity that qualifies as an exempted entity for the reporting requirements has or will have direct or indirect ownership interest in a reporting entity, the reporting entity must, with respect to the exempted entity, list the name of the exempt entity, but it does not need to report the information with respect to the exempt entity unless otherwise required.
Penalties for Failure to Comply
It is unlawful for any person or reporting company to “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to the Financial Crimes Enforcement Network” or “willfully fail to report complete or updated beneficial ownership information.”
Both civil and criminal penalties can be enforced for reporting violations. Any person that intentionally fails to comply with the reporting procedures described above can be liable for fines and penalties up to $500 for every day that the violation has not been remedied and may be fined up to $10,000, imprisoned for no more than two years, or both. Additionally, in the event of an unlawful disclosure of beneficial ownership information, fines and penalties may be assessed up to $250,000.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
Special thanks to contributing authors: Daniel Platek and Jacob Pallotta