Earlier this year, Congress passed the Corporate Transparency Act (CTA), which will require certain small businesses to identify and disclose information about their owners. While the purpose of the law is to help stop money laundering (by inhibiting the abuse of shell companies used by drug dealers and other bad actors) the CTA will have the effect of imposing additional burdens – and costs – on new and existing small businesses.
Requirements of the Corporate Transparency Act
Under the CTA, which is expected to take effect in 2022, each corporation or limited liability company formed under the laws of any state is required to file a report with the Financial Crimes Enforcement Network (FinCEN), containing a list of the beneficial owners of the corporation or limited liability company. For each beneficial owner, the applicant will have to disclose the following information:
- full legal name;
- date of birth;
- current residential or business street address; and
- 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.
This information will be required to be updated on an annual basis.
Who is a “Beneficial Owner”
The CTA defines a “beneficial owner” of a corporation or a limited liability company as any “natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:”
- exercises substantial control over a corporation or limited liability company;
- owns 25 percent or more of the equity interests of a corporation or limited liability company; or
- receives substantial economic benefits from the assets of a corporation or limited liability company.
There are a few exemptions to who constitutes a beneficial owner, including: a minor child, a person acting as an agent on behalf of someone else, a person acting solely as an employee of the company, a person whose interest in the company is through inheritance, or a creditor of the company.
Exemptions From the CTA
Importantly, the CTA exempts a number of businesses from its disclosure requirements, mostly larger companies and companies in heavily regulated industries and, specifically, including:
- publicly traded companies;
- financial institutions such as banks and credit unions, and investment advisors;
- insurance companies and public accounting firms;
- public utilities;
- non-profit organizations; and
- any business that employs more than 20 full-time employees in the U.S., has revenues in excess of $5 million and has a physical presence in the U.S.
The CTA also generally exempts any entity that is owned by an exempt entity.
What Companies Should Do Right Now
The CTA does not officially go into effect until FinCEN issues final regulations (which will be by 2022) but as of now, we know that new companies that are not exempt will need to make their disclosure filings when their business is registered with the state, while existing companies will have two years from the date of the final regulations to make their filings.
Businesses need to understand whether they will need to comply with the CTA or whether they are exempt. On a going forward basis, businesses that form new companies will also have to ensure that they comply with the CTA or confirm they are exempt. While there are a number of exemptions in the CTA, the vast majority of small businesses will not qualify, and the burden will be on them to comply with the CTA’s requirements; otherwise, they could face penalties.
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