CORPORATE TRANSPARENCY ACT

 

A new federal law has been enacted which will have a significant impact on businesses and their owners and managers.  The new law is called the Corporate Transparency Act (“CTA”), and it will impact almost all LLCs, corporations, limited partnerships, and other closely held entities, both domestic and foreign.  The law becomes effective January 1, 2024. 

The purpose of the CTA is to create a national database of companies in the U.S. that identifies the person(s) behind the companies serving as owners or control persons.  This new law is part of an increasing effort to combat money laundering, terrorism, tax evasion, and other financial crimes.  Congress intended to try to help law enforcement by creating this national database of organizations that might be involved in such activities, but it will apply to all entities even if the entity is not involved in those types of activities.

The Financial Crimes Enforcement Network (“FinCEN”), which is a bureau of the United States Treasury Department but is not part of the IRS, will be in charge of creating and maintaining the database.  As of now this database will not be of public record but will be available to a variety of agencies and possibly others in the future.  All “reporting companies” will be required to file reports with FinCEN that provide certain information regarding the companies and “beneficial owners” of the companies – the persons behind the companies.  The beneficial owners are those who directly or indirectly, through any contract, arrangement, relationship, or otherwise (i) exercise substantial control over the entity or (ii) own or control not less than 25% of the ownership interests of the entity.  For some companies, determining who is the beneficial owner may be easy.  For others, it may be more difficult.  Regardless, the determination will need to be made.

The reports will contain information about both the reporting company as well as its beneficial owners.  The information regarding the reporting company includes:

  • The full legal name of the reporting company;
  • Any trade name or “doing business as” name of the reporting company;
  • A complete current address consisting of the street address of the principal place of business in the US or the street address of the primary location in the US where the reporting company conducts business;
  • The State, Tribal or foreign jurisdiction of formation of the reporting company or for a foreign reporting company, the State or Tribal jurisdiction where such company first registers; and
  • The Internal Revenue Service (“IRS”) Taxpayer or Employer Identification Number (“TIN” or “EIN”) of the reporting company or for a foreign reporting company that does not have a TIN, a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction.

The beneficial owner information for each beneficial owner of the reporting company and for every individual who is a company applicant with respect to the reporting company will need to be provided.  That information includes:

  • The full legal name of the individual;
  • The date of birth of the individual;
  • A complete current address consisting of either the individual’s residential street address, or in the case of a business that serves as a company applicant, the street address of the business;
  • A unique identifying number and issuing jurisdiction from one of the following documents:
    • A non-expired passport issued by the United States government;
    • A non-expired identification document issued to the individual by a State, local government or Indian tribe for the purpose of identifying the individual;
    • A Non-expired driver’s license issued to the individual by a State; or
    • A non-expired passport issued by a foreign government to the individual if the individual does not have any of the other above-listed documents;
  • An image of the document from which the unique identifying number in the list above was obtained.

This new law will affect virtually all small family businesses.  This includes LLCs and other entities designed only to hold real estate.  Even if an entity has only one owner and is ignored for federal income tax purposes (such as a single-member LLC), that entity still will have to file reports with FinCEN. 

The rule goes into effect January 1, 2024.  For entities that already exist by that date, their initial reports are due no later than January 1, 2025.  For entities created in 2024, their initial reports will be due within 90 days from the creation of the entity.  For entities created on or after January 1, 2025, their initial reports are due within 30 days from the creation date.   As of now, the final regulations do not allow for extensions and there are stiff civil and criminal penalties for failing to file – so this is not something that can be missed.  That said, as of the date of this letter, the process for reporting the beneficial owner information and information for reporting companies has not been completed yet and further regulations may be forthcoming. 

CTA does allow for the exemption of certain entities from the reporting requirement.  These exemptions stem, in part, from the fact that these entities are already subject to significant reporting requirements.  However, exempted entities must also file to show they are exempt.  So, even if you have an exempted company, you cannot ignore this.  Exempted from this requirement are the following entities:

  • An issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934.
  • Bank, credit union, or depository institution.
  • Money transmitting business registered with FinCEN.
  • Broker or dealer in securities.
  • Investment company or investment adviser.
  • Insurance company.
  • A futures commission merchant.
  • Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act.
  • Public utility.
  • Pooled investment vehicle.
  • Tax-exempt entity that is described in section 501(c) of the Internal Revenue Code (“Code”).
  • A political organization as defined in section 527(e)(1) of the Code.
  • A trust described in paragraph (1) or (2) of section 4947(a) of the Code.

If you have any interest in a closely held entity, such as an LLC, corporation, or limited partnership, or if you exert significant control over any such entity (which might include any officer, director, manager, chief financial officer, or investment trustee) then you may be subject to these requirements.  If so, then you may be responsible for filing reports with FinCEN.

Given the difficulties of identifying all the entities and persons that will have to report, we suggest that you begin now:

  1. Assemble a list of every privately held entity that you own an interest in or exert control over.  Keep in mind that under the qualifications above if you are a manager, officer, or director, you may be considered a beneficial owner even if you do not own an interest in the company.  For any entity for which you believe you may be responsible as to the reporting requirement with FinCEN, begin to gather the reporting company information listed above.
  2. Obtain a copy of the certificate that was filed with the state where the entity was formed.
  3. Assemble the beneficial owner information listed above for all individuals who are beneficial owners as well as those individuals who were the company applicants for any entity for which you believe you may be responsible as to the reporting requirement with FinCEN.

We stand ready to help you to comply with these new regulations while minimizing overall disruption.

 

FINCEN General Page - https://www.fincen.gov/boi

Small Business Resources - https://www.fincen.gov/boi/small-business-resources

Videos - https://www.fincen.gov/boi/videos