The Financial Crimes Enforcement Network (FinCEN), a subdivision of the U.S. Treasury Department, has released its final rule governing enforcement of the Corporate Transparency Act. FinCEN’s regulations will soon require millions of businesses across the country to gather information about their owners and key decision makers and report that information to FinCEN.
The Corporate Transparency Act will not go active until January 2024, but the reporting requirements for businesses are extensive, and businesses with complex ownership structures will need to be especially diligent to ensure that all of the business’s “beneficial owners” have been properly identified. In addition, for companies whose business involves regular changes in ownership information or involves frequent new business registrations, it will be important to have an effective compliance program in place.
What exactly is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) is the most recent effort to combat money laundering, terrorism funding, and other illegal activities. Many states do not collect detailed information about the owners and key principals of a company, instead allowing the names of the owners, and in some cases even the address of the business, to remain confidential. This lack of reporting acts as a substantial impediment to law enforcement in identifying owners involved in the operation of illicit businesses.
The CTA is designed to help remedy this by requiring most businesses in the United States to file reports on their “beneficial owners.” Banks and certain financial institutions are required to report information to FinCEN already, and that information is used by state and federal law enforcement to aid in investigations of money laundering. The CTA takes this to the next level and will require millions of businesses to gather and self-report information about owners and key officers of their company.
You can learn more about how FinCEN uses information disclosed to it on their website, including a summary of uses here.
What does the CTA require?
The CTA requires that companies to disclose certain information about “beneficial owners.” Beneficial owners are those who, directly or indirectly, own or control more than 25% of the company or exercise “substantial control” over the company. Companies must collect and report the name, date of birth, and address of all beneficial owners of the company. In addition, companies must disclose the beneficial owners’ “unique identifying number and issuing jurisdiction” from a valid identity document, such as a driver’s license or passport, as well as a photo or copy of the identifying document.
While the 25% threshold is simpler to determine, “substantial control” is a subjective analysis, and the regulation provides some guidance on what is sufficient control to necessitate reporting. For example, a senior officer is often a substantial controller of the business, though the regulation also recognizes that some senior level positions, like a corporate secretary, may not actually exercise much control or influence over company operations depending on the situation. The regulation also provides illustrative examples of what types of decisions are important enough that control over them may require reporting as a beneficial owner of the company. They include having substantial influence over major expenditures, issuance of equity, incurring significant debt, and important decisions about the company’s lines of business and geographic focus.
Every business has differences in their ownership and control structure. Businesses should closely read the guidelines within the regulation for each person who has influence or a role in major company decisions to determine who may count as a beneficial owner of the company.
Finally, businesses that form after January 1, 2024 must also disclose information about the people who registered the business.
What businesses are required to comply?
The CTA requires any “corporation, limited liability company, or any entity created by filing a document with a secretary of state or any similar office” to comply, unless they can meet one of the exemptions. As a result, most businesses registered with their secretary of state will have to report unless they determine they can meet an exemption under the regulations promulgated by FinCEN. “Am I exempt?” will be the main question for many business owners.
The current regulation sets out 23 different exemption categories that relieve companies from the reporting burdens under the CTA. For many businesses, there are three key types of exemptions: exemptions for already regulated businesses, an exemption for “large operating companies,” and an exemption for “inactive entities.”
1. Regulated Entities
Many of the 23 exemptions apply to businesses operating in certain regulated industries. For example, many businesses that are involved in the issuance, trading, and sale of securities or commodities, as well as banks and credit unions, will find one or more exemptions under the new regulations. Businesses like these, which are already subject to heightened disclosure requirements about their key affiliates, may not have to follow the CTA.
Not all reporting requirements are created equally. Exemptions for regulated entities are highly specific and only exempt businesses that are part of specific reporting systems already. Before deciding whether a business qualifies, you should carefully review the regulation and consult with your legal professional to ensure that your business is already covered by an acceptable regulatory requirement and is therefore exempt under the CTA.
2. Large Operating Companies
Businesses not operating in certain regulated industries may still enjoy an exemption from the new reporting requirements if they are sufficiently large. The CTA regulations exempt “large operating companies,” which requires the company to employ more than 20 full time employees in the United States, have an operating presence and physical office within the United States, and have filed an income tax return in the United States that documents more than $5,000,000 in gross receipts or sales within the United States.
For certain business types, this is a promising option. However, this exemption still requires adequate U.S. based operations both in terms of receipts and in employment. Businesses who have fluctuations in employee counts or rely on many part-time employees should be especially careful in determining whether they meet this exemption.
3. Inactive Entities
Certain entities that have been dormant also enjoy an exemption, but there are some limits to eligibility that may catch business owners that are not careful about confirming their business qualifies. Among other requirements, the entity must be sufficiently old, and there are highly restrictive requirements for inactivity that must be followed.
What about trusts?
FinCEN’s regulatory requirements will require disclosure of the details of trusts in certain cases. The CTA will require all reporting companies to disclose their “beneficial owners,” including disclosure of those individuals who “directly or indirectly own or control” the portion of the business that is being reported. For trusts, this is likely to include trustees, but may also include grantors and beneficiaries of trusts in certain cases, depending on how the trust is structured. Businesses should review all of their affiliates who may be beneficial owners under the regulation, and then review the regulation’s guidance for trusts if applicable.
I use an LLC as part of my estate plan, will I have to disclose information about the LLC?
Using LLCs for estate planning is a useful tool for certain situations, but the CTA does not distinguish between ‘business’ LLCs and ‘estate planning’ LLCs. People who use LLCs as an estate planning tool will have to determine if there is an applicable exemption to avoid being subject to the CTA. Given that the exemptions focus on large businesses, or those that are already subject to reporting (such as securities related entities), some estate planning LLCs will likely be required to disclose information about owners under the CTA.
When do existing businesses need to comply?
The regulations go into effect next year, and give existing businesses until January 2025 to comply. However, there may be additional changes and updates to the regulations as time goes on. While FinCEN released the regulation as its “final” version, they may make further changes later this year or even in 2024 if there are unexpected challenges. Existing businesses should keep an eye out for further changes, but otherwise make a compliance plan for 2024.
By design, the CTA intends to require most businesses in America to either determine whether it can be exempted from CTA requirements or comply by collecting detailed beneficial owner information. The requirements involved in complying with the CTA will be onerous for certain companies. However, those burdens can be mitigated by creating a plan for collecting the necessary information from beneficial owners, especially owners that are themselves corporate entities or trusts. If you have questions or would like assistance developing a plan to comply with the CTA, Landon Troester and the other members of the Business Group at Clyde Snow & Sessions are here to help.