Recently, the United States Department of the Treasury proposed regulations that made it quite certain that by the end of 2022 there will be a new reporting requirement for owners of closely held businesses under the so-called Corporate Transparency Act (the “CTA”).
The CTA was passed by Congress in January 2021 and makes the Financial Crimes Enforcement Network of the Department of Treasury (“FinCEN”) responsible for collecting data concerning the ownership of corporations and other entities. The CTA requires “Reporting Companies” to report the identities and information concerning their “Beneficial Owners” at the time of formation or registration and within one year after the date on which there is a change with respect to any information previously reported.
The recently published proposed regulations clarified the details about the CTA’s reporting requirements. The Proposed Regulations reaffirm that all entities incorporated in any State or Indian tribe, or any entity that offers limited liability to its owners by virtue of any State of tribal law will be required to report. In addition, entities that are formed under foreign jurisdictions that are registered to do business within the U.S. will be subject to the CTA’s reporting requirements as well. It is likely that the statue will exempt tax-exempt entities, entities assisting tax-exempt entities, and “large operating companies,” which are entities that (a) employ more than 20 full-time employees in the U.S.; (b) have an operating presence at a physical office in the U.S.; and (c) file a federal income tax return or information return reporting more than $5 million in gross receipts or sales in the U.S. Also exempt are what the statute and Proposed Regulations define as “inactive” entities.
In addition to providing basic information about itself, every Reporting Company will need to provide information about every individual who is a beneficial owner of the Reporting Company and every individual who is a “Company Applicant.”
- “Beneficial owners” are any individuals who, directly or indirectly, either exercise substantial control over the Reporting Company or own or control at least 25 percent of the ownership interests in the Reporting Company.
- “Substantial control” of a Reporting Company is defined to include, among other things, as (a) service as a senior officer of a Reporting Company; (b) authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors or similar body; or (c) the authority to direct, determine, or decide or have substantial influence over important matters concerning the Reporting Company; or (d) any other form of substantial control over the Reporting Company. Most importantly, substantial control does not depend on the individual’s office or title. Therefore, an individual could be deemed to have substantial control if the individual has the ability to direct such things as major expenditures, the issuance of equity interests, the approval of the Reporting Company’s operating budget, the selection or termination of business lines, the amendment of governance documents, or the amendment of any substantial governance documents. The means through which the individual exercises control is irrelevant; and an individual may be deemed to have substantial control even if the individual has not exercised this type of control, as long as the individual possesses it.
- A “Company Applicant” is the individual who files the document that creates the Reporting Company or registers a Reporting Company, “including any individual who directs or controls the filing of such document by another person…” This means that lawyers, accountants, or paralegals who file documents that establish an entity and, likely, also the persons who direct the activity of the person filing the organizational documents are deemed to be Company Applicants.
With regard to Beneficial Owners and Company Applicants, the individual’s disclosure obligations include the person’s full legal name, the person’s date of birth, the business address of a Company Applicant, the residence address of each Beneficial Owner, and either the person’s passport number, driver’s license number or another unique identifying number issued to the person. A Company Applicant or Beneficial Owner also must provide a picture ID that includes the disclosed identification number or, in the alternative, a FinCEN identifier.
Initial reports must be filed within fourteen (14) days after the date a domestic Reporting Company is formed, and a foreign Reporting Company is registered. Pre-existing entities must file their initial reports within one (1) year after the effective date of the final regulations. In addition, initial reports must be amended within thirty (30) days after there is a change with respect to previously provided information. Final regulations are anticipated to be adopted in November 2022.