Business entities such as corporations and limited liability companies are formed for many reasons, including to shield their owners from personal liability for corporate acts.
Until recently, an additional benefit was shielding the identities of entity owners from disclosure, including from the government.
Despite the majority of honest, law-abiding entity owners, some owners have abused this protection to conduct or facilitate illegal conduct such as money laundering or tax fraud.
To address this problem, Congress has taken steps to create a centralized database of entity owners’ identities.
On January 1, 2021, Congress overrode former President Trump’s veto of the 2021 National Defense Authorization Act, which included the Corporate Transparency Act (the “Act”).
The Act directs the U.S. Department of the Treasury to create and maintain an identification registry for each “beneficial owner” of all current and future corporations and limited liability companies in the United States. Each entity will be required to provide the full legal name, date of birth, current address and unique identifying number, such as from a current driver’s license or passport, for each “beneficial owner” of such entity.
A “beneficial owner” includes any 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 percent of its ownership interests.
A major exception to these requirements is an entity that (i) employs more than 20 employees on a full-time basis in the United States, (ii) filed U.S. income tax returns in the previous year demonstrating an aggregate of more than $5 million in gross receipts or sales, including those of other entities (a) owned by the entity and (b) through which the entity operates; and (iii) has an operating presence at a physical office within the U.S.
There are over 20 additional exceptions to the requirements, which mainly cover broad classes of regulated, publicly traded, nonprofit or government entities, including banks, insurance companies and political organizations.
To implement the law, the federal Financial Crimes Enforcement Network (“FinCEN”) will establish a registry and the Secretary of the Treasury will prescribe regulations by the end of 2021. Within two years of the effective date thereafter, existing entities must report the required information to FinCEN. Any entity formed after the effective date will be required to submit the required information to FinCEN at the time of formation.
So far, no formal guidance exists on the states’ responsibilities with respect to the implementation of the Act, although formal guidance is anticipated by the time entities must begin their reporting. One question is how an entity is to determine whether a non-owner exercises “substantial control” over the entity so as to make the person a “beneficial owner” under the Act.
The reporting requirements should only create a minimal administrative burden for many small businesses. Reported information will be confidential and disclosed in limited circumstances, including federal agency requests regarding national security, intelligence or law enforcement, and where financial institutions are subject to customer due diligence requirements under applicable law (e.g. the Bank Secrecy Act).
Entities failing to provide required information or providing false information can be subject to civil and criminal penalties.
FOS is monitoring the issuance of guidance under the Act. In the meantime, if you have any questions regarding the Act or any other legal matter, contact FOS.