The Corporate Transparency Act (CTA) was enacted by the US Congress on January 1, 2021, as part of the National Defense Authorization Act. Upon taking effect in 2022, it will apply mainly to small US businesses, requiring certain companies to file a report providing the name, date of birth, current address and unique identification number (e.g., from a passport or driver’s license) of the company’s “beneficial owner(s).”
The report will be filed with the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury Department. This information must be updated every year to reflect any changes.
The CTA will become effective when the regulations published by FinCEN go into effect, and that date can be no later than January 1, 2022 (one year after enactment of the CTA). On April 5, 2021, FinCEN published a proposed set of regulations to gather public comments. Since there have been no additional updates from FinCEN regarding the official publication, the regulations (and thus, the CTA) are expected to take effect on January 1, 2022.
Timing for Compliance
The timing of a company’s initial reporting will depend on whether a company was formed before or after the CTA takes effect:
- For entities existing before the date that FinCEN has published final regulations on the CTA, the reporting must be done in a timely manner and not later than two years after the effective date of the regulations.
- For entities formed or registered after the FinCEN regulations take effect, the report must be filed at the time of formation or registration.
Subsequently and upon a change in beneficial ownership, a reporting company (see definition below) must update the information provided to FinCEN within one year of the change.
The CTA defines a “reporting company” as “a corporation, limited liability company, or other similar entity” that is created by the filing of a document with the state or Indian tribe, or formed as a foreign entity registered to do business in the United States. The definition explicitly excludes an extensive list of entities; the list of most prominent such entities (among the 24 listed) includes the following:
- Publicly traded companies (subject to Securities and Exchange Commission (SEC) regulations)
- Companies employing more than 20 full-time employees in the United States, operating from a physical office in the United States and having filed a tax return demonstrating more than $5 million in gross receipts/sales
- Dormant companies that have been in existence for more than one year, are not engaged in “active business” and not owned (either directly or indirectly) by a non-US individual.
Additional exceptions exist for certain financial institutions, charitable trusts and pooled-investment vehicles.
Under the CTA, a “beneficial owner” is an individual who, directly or indirectly (1) exercises substantial control over an entity or (2) owns or controls at least 25% of the ownership interests in an entity.
There are five exceptions to this definition:
- A minor child, if the child’s parent’s or guardian’s information is otherwise is 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.
As the effective date of the CTA approaches, small business owners and entrepreneurs planning to launch new business entities should pay close attention to FinCEN’s publication to ensure regulatory compliance.