With the stated goal of “Counter[ing] Money laundering, financing of terrorism and other illegal activities. “ The Corporate Transparency Act (the “Act”), passed on January 1, 2021, imposes novel beneficial ownership disclosure requirements on corporations, limited liability companies and “similar rights”[ies]”. For the first time, reporting companies are required to register “personally identifiable information” of their “beneficial owners” with FinCEN, the Treasury’s Financial Crimes Enforcement Network. Customers would do well to take these new commitments seriously, as willful failure to comply can penalize an offender with up to 2 years’ imprisonment and a fine of $ 10,000.
Small businesses are likely to be hardest hit by the law. The disclosure requirements do not apply to companies with (i) more than 20 full-time employees in the United States, (ii) gross income or sales in excess of $ 5,000,000 as reported in the previous year’s income tax return, and (iii) an in the USA based “physical office”. Heavily regulated companies, including banks, brokers and broker-dealers, publicly traded companies and investment companies, and some of their subsidiaries, are also generally exempt.
Unfortunately there is some ambiguity in the applicability of the law. Presumably, limited partnerships and statutory trusts are “similar” enough to corporations and limited companies to fall within the scope of the law, although that is not yet certain. It is also unclear whether a company with $ 5 million receipts, 20+ full-time employees, and a mailing address at the founder’s home has an appropriate “physical” office that can be exempted from disclosure requirements under the law.
The critical term “beneficial owner” is also subject to interpretation. A person who “exercises significant control” or “owns or controls at least 25 percent of the ownership interests” is a beneficial owner. But what is substantial control? While underage children are excluded from the definition of beneficial owner, Are the ownership interests of a custodian holding shares on behalf of a child aggregated with those of the custodian in their individual capacity? While creditors are not beneficial owners, Can preferred equity look like debt that holders of those interests can avoid disclosure? How are different interest classes aggregated for the purpose of the 25 percent rule?
Many questions remain unanswered, although they may be resolved by regulations due to be adopted by the Treasury Department no later than January 1, 2022. After acceptance, the companies concerned must meet the reporting requirements when they are set up. Existing companies have two years to meet the requirements. Corporate Transparency Act, HR 6395 § 6402 (5) (D)
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