Congress passed the Corporate Transparency Act (CTA) on January 1, 2021. The CTA instructed the Financial Crimes Enforcement Network (FinCEN) to adopt regulations that would help prevent and identify illegal activities that often occur through the use of anonymous shell companies. The mechanisms include mandatory reporting of the identification information of the “beneficial owners” of a nonexempt company. The required reported information will include the beneficial owners’ full legal name, date of birth, address, and identification number (such as a driver’s license number). A beneficial owner is defined as “a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over a corporation or limited liability company; (ii) owns 25 percent or more of the equity interests of a corporation or limited liability company; or (iii) receives substantial economic benefit from the assets of a corporation or limited liability company. ” Exemptions apply to a variety of companies such as utilities, churches, businesses with more than 20 full-time employees, and businesses that file income tax returns in the United States showing more than $5,000,000 in gross receipts or sales.
If you meet the definition of a beneficial owner and do not fall into one of the exemptions, here are some basics for you to know and consider:
1. Although the CTA was passed at the beginning of the year, FinCEN is still in the process of drafting regulations, which are due by January 2022. Because final regulations have not been adopted, it is hard to say exactly what will be needed from and expected of nonexempt businesses.
2. To avoid penalties, existing companies will need to update FinCEN with the required information no later than December 31, 2023. New companies will be expected to provide this information when a business is formed. To efficiently complete the entity formation process after December 31, 2021, you will want to make sure that you are prepared with the previously mentioned required reporting information at the time of creation. Additionally, businesses should begin collecting this information now in anticipation of completing the reporting requirements as soon as possible. Once the initial reporting has been completed, a business will only be required to update FinCEN if there is a change in the beneficial owners.
3. Finally, it would be best to review and update your business’s governing documents. Also keep in mind that it is entirely possible that changes in ownership or in the business’s structure, such as through a reorganization, merger, or acquisition, might cause what was once an exempt entity to become a nonexempt entity.
The full bill can be viewed here: https://www.congress.gov/bill/116th-congress/house-bill/2513/text
A full list of the 18 exemptions can also be located in the above link.