Corporate Transparency Act: New Beneficial Ownership Reporting Requirements

Emma L. Compton, Kenneth P. Kreider, Allison A. Westfall

On January 1, 2021, as part of the Defense Authorization bill, Congress passed the Corporate Transparency Act (the “CTA”).  The CTA drastically expands the current beneficial ownership reporting obligations under the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Certain companies already in existence and newly-formed entities will have to comply with the new beneficial ownership reporting obligations. This is of interest to anybody engaged in private business and real estate transactions.

The CTA requires certain U.S. companies to file a report with FinCEN that provides the full legal name, date of birth, current address, and unique identification number (i.e., a passport or driver’s license number) or FinCEN identification number, of the business’s “beneficial owner(s)” and “applicants”.  This report must be updated once a year to reflect any changes. The CTA requires FinCEN to store the information it receives in a private database that is not accessible to the public, and FinCEN may only release the information for law enforcement, national security, or intelligence purposes. 

Reporting Companies

The reporting requirements of the CTA apply to all “reporting companies” unless exempted.  Reporting companies include existing corporations, limited liability companies, and other similar entities as well as new entities when they are formed.  Such new entities are often formed as subsidiaries in financing and real estate transactions.  Companies exempted from the requirements of the CTA include, among others:

• Publicly traded companies
• Governmental entities
• Banks and bank holding companies
• Credit unions
• Broker dealers
• Registered investment companies
• Registered investment advisors
• Insurance companies
• Registered public accounting firms
• Public utilities
• Companies with more than 20 full-time employees in the United States, more than $5 million in gross receipts or sales, and an operating presence at a physical office in the United States.
• Churches, charities and other nonprofit organizations
• Entities owned or controlled by one or more exempt entities

Beneficial Owners and Applicants

Under the CTA, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (i) exercises substantial control over an entity; or (ii) owns or controls at least 25% of the ownership interest in an entity.  The CTA explicitly exempts the following from the term “beneficial owner”:

• A minor child, if the child’s parent’s or guardian’s information is otherwise reported properly
• An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual
• An individual acting as an employee whose control is derived solely because of employment status
• An individual whose only interest in the entity is through a right of inheritance
• A creditor of the entity, unless the creditor meets the requirements of a beneficial owner

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.  The terms “file” and “register” are not defined in the CTA.  FinCEN is expected to provide relevant guidance in its forthcoming regulations.

Timeline for Compliance

Reports will begin to be required once FinCEN implements regulations—no later than January 1, 2022. The CTA’s timing requirements for reporting depend on the stage of entity formation and changes in beneficial ownership.  These timing requirements are as follows:

• Reporting companies in existence before the effective date of the FinCEN regulations will have two years to file initial reports.
• Reporting companies formed or registered after the effective date of the FinCEN regulations must file initial reports at the time of formation or registration.
• Reporting companies must update its report if there is a change in beneficial ownership.

Penalties

The CTA imposes both civil and criminal penalties for the willful failure to report complete or updated beneficial ownership information, for willfully providing false or fraudulent information to FinCEN, or for knowingly disclosing or using information obtained through the report submitted to FinCEN or disclosed by FinCEN.  Any person—not just the reporting company—who violates the reporting requirements under the CTA may be subject to civil fines of up to $500 per day and criminal fines of up to $10,000 and/or imprisonment for up to two years.  The CTA implements safe harbors from these fines that allow reporting companies to correct inaccurate information. 

KMK will be prepared to complete the required filings on behalf of its clients when forming new entities that are reporting companies. In addition, we can assist you in applications for the many existing entities you may control that have become reporting companies as a result of the CTA.  This may lead to some corporate “housekeeping”.  KMK is eager to help you understand the CTA and provide guidance on the full extent of reporting requirements. We will continue to monitor the CTA’s implementation and forthcoming FinCEN regulations.

For more information or assistance, please contact a member of the KMK Law Business Representation & Transactions or Real Estate Group.