On January 1, 2021, Congress enacted the Corporate Transparency Act (the “CTA”) as part of the Anti-Money Laundering Act of 2020. The main purpose of the Corporate Transparency Act is to protect the United States financial system from being used for money laundering and other illicit activities. Effective January 1, 2024, the CTA requires a range of different entities to file a report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

According to the Reporting Rule, FinCEN is issuing a Final Rule requiring certain entities to file reports that identify: the beneficial owners of the entity and the individuals who filed an application with government authorities to create the entity or register it to do business. The prior lack of beneficial owner information (“BOI”) reporting requirements made the U.S. the obvious choice to establish shell companies to ultimately hide beneficial owners and move funds.

… nearly every family business in the U.S. will be swept under this new law

The CTA regulations are written so broadly that nearly every family business in the U.S. will be swept under this new law. According to initial studies, the FinCEN estimates that over 32 million entities will have to file BOI reports in the first year of the Final Rule taking effect.

So, what does that mean for business owners? In this week’s post, we answer the main questions stemming from the Final Reporting Rule of the Corporate Transparency Act that will most likely affect you and your family business.

Who Is Required To Report?

Any entity that is a corporation, a limited liability company (“LLC”), or a created entity filed with a Secretary of State must comply with this new reporting rule. Additionally, any entities mentioned above that are formed under the laws of a foreign country and registered to do business in any U.S. state are also subject to BOI reporting requirements. These requirements include pre-existing companies and newly formed domestic and newly registered foreign entities.

Exemptions?

There are 23 listed types of entities that are exempt from the definition of reporting company and, consequently, do not need to file reports. These include governmental authorities, banks, and accounting firms, among others. A couple corporate exemptions include:

• Large operating companies that meet certain criteria, specifically, an entity that employs more than 20 full-time employees, $5 million in gross receipts or sales per filed federal tax return in the previous year, and an operating presence through a physical office in the United States.
• Publicly traded companies that are issuers of securities and registered under the Securities Exchange Act of 1934 are also exempt.

What Information Needs to be Reported?

The Reporting Company must file each entity’s business name, current address, state of formation, and Employer Identification Number (“EIN”).   The Reporting Rule takes this a step further and requires the Reporting Company to identify every entity’s direct or indirect beneficial owner. For beneficial owners, the information required includes full legal name, birth date, address, and government-issued ID—driver’s license or passport.

The Reporting Rule defines a beneficial owner as an individual who meets at least one of two criteria: (1) the individual exercises substantial control over the reporting company; or (2) the individual owns or controls at least 25 percent of the ownership interests of the reporting company.

Substantial Control

There are three specific indicators that determine “substantial control” set forth by the Reporting Rule:

• Service as a senior officer of the Reporting Company—including CEO, CFO, COO, or general counsel
• Authority over the appointment or removal of any senior officer or a majority of the board of directors
• Decision-making over important matters of the Reporting Company—including reorganization, dissolution, or merger

Ownership Interest

The proposed Reporting Rule provides that ownership interests would include both equity in the company and other types of interests, such as stock, capital, or profit interests. Debt instruments will be included if they enable the holder to exercise the same rights as one of the specified types of equity or other interests. The proposed rule applies to any direct or indirect ownership interest, including through joint ownership and certain trust agreements.

When Is the Report Due?

The Reporting Rule goes into effect on January 1, 2024, and companies that exist before January 1, 2024, and meet the reporting requirements will have one year to file the required information. Entities created on or after January 1, 2024, will be required to file within 30 days of receiving notice.

Who Has Access?

The Corporate Transparency Act has authorized the FinCEN to disclose beneficial owner information to U.S. government agencies, certain financial institutions, as well as certain foreign agencies. The Reporting Rule states that collecting this information and providing access to law enforcement, the intelligence community, regulators, and financial institutions will diminish the ability to obscure activities through shell companies. Federal agencies will need to provide FinCEN with justified reasoning for their request, while local and state agencies will need an authorized court document to access this information.

Key Takeaways

Existing and new-forming companies will need to initially review the structures and operations of the company to determine if they are eligible for an exemption. If no exemption applies, determine who qualifies as having sufficient ownership interests that trigger the reporting requirement. And lastly, identify the members who exercise “substantial control” over the company to then comply with the beneficial owner information reporting requirements.

Due to the requirements being new, broad, and open for interpretation, there are still some unknowns to the Reporting Rule, as well as some judgment in determining who exercises substantial control over the Company.

Don’t let the reporting requirements under the Corporate Transparency Act Reporting Rule trip up your family business. Develop a plan now to ensure that you will be in compliance.

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Additional Resources

Get Ready for the Corporate Transparency Act (forbes.com)

Understanding the Corporate Transparency Act and Ensuring Compliance (goulstonstorrs.com)

FinCEN Issues Final Rule Implementing Corporate Transparency Act Requirement | Insights | Holland & Knight (hklaw.com)