U.S. Entities One Step Closer to Beneficial Owner Transparency

The Corporate Transparency Act was enacted on January 1, 2021, as part of the National Defense Authorization Act for fiscal year 2021. It requires U.S. entities to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury. Former President Donald Trump had vetoed the bill last year, but Congress overturned his veto and enacted the bill into law.

The entities required to comply with the new law include established businesses as well as newly formed limited liability companies (LLCs) and corporations. If an entity was formed prior to the law taking effect, it will have two years after the effective date of the issuance of the final regulations to comply with the Act’s requirements.

The information collected by FinCEN will not be publicly available nor will ownership statements be generally available to the states. The details for reporting requirements under the Act will be provided by U.S. Treasury regulations and shall be issued no later than one year after enactment of the Act. Reporting requirements will take effect on the effective date of the Treasury regulations.

While business owners await further guidance, here are the answers to some initial questions:

Which businesses are considered “reporting companies”?

The type of entity required to report ownership information to FinCEN is referred to as a “reporting company,” which includes a corporation, limited liability company, or other similar entity that is either:

• created by the filing of a document with a secretary of state or similar office under the law of a state or Indian Tribe; or
• formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian Tribe.

Although not explicitly stated in the Act, partnerships and trusts that are formed and registered within the U.S. are likely to be considered “similar entities,” as described in the definition of a “reporting company,” and thus, such entities are likely to be subject to the requirements of the Act.

Who are the exempt entities?

Closely regulated entities such as credit unions, bank holding companies, registered money-transmitting businesses, broker-dealers, exchanges and clearing agencies, investment advisors, private funds, banks, insurance companies, and utility companies or telecommunications service companies, are not subject to the Act’s reporting requirements. Exempt entities include:

• publicly traded companies;
• dormant entities, as described in the Act;
• tax-exempt entities;
• taxable entities that have:
  • more than 20 full-time US employees
  • a physical office in the United States, and
  • more than $5 million in gross receipts or sales (including income or sales by other entities that are owned by such entity and through which such entity operates
• any entity owned or controlled, directly or indirectly, by an entity that is otherwise exempt.
• additional entities that FinCEN may determine on an ongoing basis.

Who will be considered a beneficial owner?

These are beneficial owners, as defined by the Act, with certain exceptions:

• a natural person who exercises substantial control over a company;
• owns 25% or more of the equity interests of a company; or
• receives substantial economic benefits from the assets of a company.

What information will be required from beneficial owners?

While the Corporate Transparency Act prohibits the issuance of a certificate in bearer form evidencing either whole or fractional interest in any corporation, limited liability company, or other similar entity formed under the laws of any state or Indian tribe, it does require the following:

• full legal name;
• current residential or business street address;
• date of birth; and
• identification number (such as a driver’s license or passport number.)

What are the penalties from non-compliance?

The penalties may include fines of no more than $500 for each day that there is a willful failure to report complete beneficial ownership information. In addition, parties or companies required to report may be subject to aggregate fines up to $10,000, or a prison term up to two years.

The Act includes safe harbor rules for any person who submits inaccurate beneficial ownership information, provided that such person had no knowledge of the inaccuracy, was not trying to evade the reporting requirement, and corrects the information no later than 90 days after the initial report was submitted.

The newly enacted Corporate Transparency Act aims to increase transparency between businesses and federal government agencies, providing useful information related to national security, intelligence, and law enforcement. While some specific provisions are still unclear, such as details on enforcement or filing requirements, we will continue to monitor further developments and provide guidance to our clients as they become clearer.

If you are unsure whether the new regulations apply to your business or have additional questions, please contact me or your Kaufman Rossin relationship manager for assistance.