As part of the National Defense Authorization Act for the Fiscal Year 2021, Congress enacted the Corporate Transparency Act (the “Act”). Beginning on January 1, 2024, the Act and final regulations issued thereunder require any “Reporting Company” to provide certain information about its “Beneficial Owners” and “Company Applicants.” Failure to report this information may result in civil and criminal penalties. The Act imposes the duty to report to the Financial Crimes Enforcement Network (“FinCEN”) on any Reporting Company.
The Act contains several definitions to help determine which entities must report thereunder. The Act defines a Reporting Company as any entity formed by a filing with a secretary of state or any foreign entity that’s registered to do business in the United States by filing with a secretary of state. This intentionally broad definition means that any corporation, limited liability company, limited partnership, or limited liability limited partnership, along with any other entity formed by filing a document with a secretary of state, will be subject to the duty to report. General partnerships, sole proprietorships, and trusts do not file documents with a secretary of state upon creation and thus are exempt from reporting. The Act exempts twenty-three categories of organizations such as banks, credit unions, depositories, and securities brokers and dealers, all of which are already highly regulated. The Act exempts both tax-exempt entities and large operating companies from its reporting requirements. The Act defines tax-exempt entities as (1) any organization described in Internal Revenue Code (“IRC”) Section 501(c)(3) that’s exempt from tax under IRC Section 5012(a)(2); (2) a political organization described in IRC Section 527(e)(1); and (3) trusts described in IRC Section 4947(a)(1) or (2). The Act defines a large operating entity as any entity that employs more than twenty full-time employees.
Although the Act excludes many entities from its application, most privately-owned businesses will qualify as Reporting Companies and will have to disclose the required information timely or be subject to penalties. Every Reporting Company needs to report its legal name, any names under which it does business, a principal business address, the jurisdiction of formation, its taxpayer identification number, and its Beneficial Owners. If the Reporting Company is newly created, it also needs to report the individual who filed the formation or registration document for the Reporting Company, called the “Company Applicant” and, if different, the individual “primarily responsible for directing or controlling such filing.” This requirement has numerous implications for attorneys; a partner may direct an associate or paralegal to make the filing, thus both individuals would meet the definition of Company Applicant. The Reporting Company will need to disclose the name, date of birth, street address, a unique identifying number from a passport, driver’s license, or another such document, and a copy of that document of each Company Applicant, limited to two individuals, to FinCEN. The Act permits individuals who anticipate being Company Applicants to register for a FinCEN number that such individuals will provide to the Reporting Company instead of their personal information. The Act separates Beneficial Owners into two categories: (1) those who exercise substantial control over the Reporting Company; and (2) those who own at least 25% of the Reporting Company. For a Beneficial Owner to meet either definition, the Reporting Company needs to disclose the same information required for that of a Company Applicant.
If an individual serves as a senior officer of the Reporting Company, has authority over the removal of a senior officer or a majority of the board of directors, directs, determines, or has substantial influence over important decisions of the Reporting Company, or has any other form of substantial control over the Reporting Company, then such individual exercises substantial control. The Act defines a senior officer as anyone holding the position or exercising the authority of a president, chief executive, financial, or operating officer, general counsel, or any other officer who performs a similar function. Note that neither treasurer nor secretary is included as the Act views those roles as ministerial in nature. However, if an individual serving in a ministerial role otherwise exercises substantial control, then such individual will need to be reported as a substantial owner.
If an individual has an interest in equity, capital, profits, convertible instruments, or options, that equals 25% or more of the entity, then the Act considers that individual an owner thereunder. The Act includes both direct and indirect ownership. Trust and Estate attorneys need to advise clients that the Act considers a trustee who can dispose of trust assets that include a Reporting Company as a Beneficial Owner of that Reporting Company. Similarly, the Act includes the sole income and principal beneficiary of a trust owning an interest in a Reporting Company as a Beneficial Owner of such Reporting Company. Any beneficiary with the ability to withdraw substantially all of the assets of a trust containing an interest in a Reporting Company will also be a Beneficial Owner of such Reporting Company.
As this article demonstrates, the Act has some complex provisions that have broad applicability. This article provides only a brief synopsis of the most relevant provisions. Estate Planning practitioners need to familiarize themselves with the provisions of the Act as it will affect any client with a privately-owned business. Attorneys will have heightened responsibilities to their clients who own Reporting Companies, both to make them aware of these requirements and to help them understand exactly what information needs to be reported and when.
Tereina Stidd, J.D., LL.M., “The Not-So Transparent Corporate Transparency Act,” American Academy of Estate Planning Attorneys, Inc., accessed February 21, 2023, https://www.aaepa.com/2023/01/the-not-so-transparent-corporate-transparency-act/