What is the Corporate Transparency Act (CTA)?
- The Corporate Transparency Act (CTA) was enacted into law on January 1, 2021, with final regulations issued on September 29, 2022. It will be effective as of January 1, 2024.
What is the primary focus of the CTA? (tl;dr: Focus is on money laundering, crimes):
- Requiring corporations, limited liability companies, partnerships, and trusts (indirectly) to disclose information on their beneficial owners.
- Enhancing the ability of the Financial Crimes Enforcement Network (FinCEN) to protect U.S. national security and its financial system.
- Ensuring that the disclosed information is only available to law enforcement agencies, and not an open public register.
Reporting Companies under CTA (tl;dr: Reporting obligation for small family businesses and holding companies, including LLCs and other entities designed only to hold a rental home):
- The reporting requirements are primarily targeted at closely held companies. Virtually all entities other than trusts that we handle as trusts & estates professionals fall squarely within the reporting company definition.
- Trusts and estates are not directly reporting companies. However, most estate planners move business entity ownership into trusts, in some way, shape, or form, and the trust ownership and trustee identity, as well as in many cases, the underlying beneficiaries, will need to be identified by the reporting entity to FinCen.
- There are some exemptions as to who needs to report- but it mostly applies to already heavily regulated entities, such as large corporations and tax-exempt organizations.
- This applies to foreign companies that do business in the US.
Beneficial owners under the CTA (tl;dr: Anyone with over 25% control of a reporting company):
- Those who either exercise substantial control over a reporting company or own/control at least 25% of its ownership interests.
- The CTA defines a "beneficial owner" as an individual who exercises substantial control over an entity or owns or controls at least 25% of the ownership interests of the entity. However, there are exceptions to this definition. For instance, minors, those acting as nominees, intermediaries, custodians, or agents on behalf of another individual, those solely acting as employees, and individuals whose only interest in the entity is through inheritance are generally not considered beneficial owners under the CTA.
What are the ongoing requirements? (tl;dr: You get 30 days to report changes)
- Reporting companies will be required, on an ongoing basis, to report any changes in beneficial ownership to FinCen within 30 days of the change.
Penalties for Non-Compliance (tl;dr: Failure to report = heavy fines, prison!):
- Failure to accurately report beneficial owner information and late filings can lead to significant penalties. This includes fines ($500 for each day the violation continues) and criminal penalties (imprisonment of up to two years and/or a fine of up to $10,000).
Does this impact my estate planning clients? (tl;dr: YES - it affects past, present, and future clients)
- Estate planning lawyers and their clients should review their existing structures, such as family limited partnerships or limited liability companies, to determine if they fall under the reporting requirements.
- Estate planning lawyers and their clients should also review the underlying holdings of any trusts that are invested in closely held businesses, as well as the terms of the trust, to determine whether that entity will be required to make informational disclosures about the trust, trustee(s) and one or more of the beneficiaries.
Does this affect trusts? (tl;dr YES and you need to know about it)
If a trust is a beneficial owner of a reporting entity, the following individuals must be disclosed:
- Trustees - If a trust owns an interest in a reporting company, the trustee is reported as the beneficial owner. In the case of corporate trustees, the specifics of who gets reported remains unclear in the final regulations.
- Certain Beneficiaries - If beneficiaries have rights to demand income, or receive all of the trust income (via mandatory distributions of income), or has the right to withdraw all of the assets (via a withdrawal power over the corpus of the trust) they will also need to be reported as beneficial owners.
Do estates of deceased beneficial owners report? What about the estate beneficiaries? (tl;dr: No, but once the estate is settled, and there is/are a new beneficial owner (for instance, a person or ongoing trust under a will) the reporting company must update FinCen as to the change and the new owner’s information.)
- When a beneficial owner of a reporting company dies, the company doesn't need to immediately notify FinCEN. However, once the deceased owner's estate is settled, either through US intestacy laws or a will, the company must update FinCEN about any changes in beneficial ownership within 30 days. (31 CFR 1010.380(a)(2)(iii))
- This applies if the deceased was a beneficial owner due to interests that transfer upon death, not just because of a 25% ownership.
What about if the interest is divided among multiple estate beneficiaries?
- For an ownership interest that splinters once transferred to the estate beneficiaries, the reporting company will need to review all interests transferred in order to determine whether any of the successors to the deceased beneficial owner continue to be beneficial owners of the reporting company. No special rules apply in making a determination for each of the new owners, and the reporting company will need to apply the standard beneficial owner definition to assess whether any successor is a beneficial owner by virtue of the new property interests or rights.
What Will Have to Be Reported? (tl;dr: basic identifying info)
Reporting Companies must report:
- Legal name and any trade names.
- Street address for the company’s principal place of business.
- State of formation.
- Tax Identification Number.
The information that must be reported about each individual includes:
- Full Legal Name: The actual name of the beneficial owner.
- Date of Birth: Helps in clearly identifying individuals.
- Current Residential or Business Street Address: This can't be a P.O. box. It needs to be an actual physical address.
- An identifying number from an acceptable identification document: This can be a non-expired U.S. passport, a non-expired driver's license, or a non-expired identification card issued by a state, or, for non-U.S. persons, a non-expired passport from their country of issuance.
Does anyone else need to be disclosed? (tl;dr: YES – the “company applicant,” which might be YOU, the lawyer)
- Company applicants are those individuals who are responsible for filing the documents that create the entity in the first place.
- No limit on the number of company applicants, or who is more pressing. So if 4 people are working on creating an entity (i.e., the legal assistant, a paralegal, an associate, and a partner), all four would have to disclose themselves as individuals.
- Only applies to companies created after Jan 1, 2024.
How does one file a report? (tl;dr: We don’t know yet.)
- FinCEN is in the process of developing a system where one can file reports for companies online. The system will be called the Beneficial Ownership Secure System for collecting and storing CTA reports. This system is still under construction, and reports will only be accepted starting from January 1, 2024.