Tuesday, November 30th, 2021
The Corporate Transparency Act (CTA) was enacted by Congress on January 1, 2021 as part of the National Defense Authorization Act. When it comes into effect, it will primarily apply to US small businesses and require certain companies to file a report with the name, date of birth, current address and unique identification number (e.g. from a passport or driver’s license) of the “beneficial owner” ” the company. The report will be filed with the Financial Crimes Enforcement Network (FinCEN), an office of the US Treasury Department. This information must be updated every year to reflect changes.
The CTA comes into force when the regulations published by FinCEN come into force, but no later than January 1, 2022 (one year after the CTA came into force). On April 5, 2021, FinCEN published a proposed set of rules for collecting public comments. As there have been no further updates from FinCEN regarding the official release, it is very likely that the regulations will come into effect on January 1, 2022 and the CTA will take effect on the same date.
Time for compliance
The CTA applies to companies depending on when the company was founded:
To the existing units Before FinCEN has published the final regulations on the CTA, the reporting must be carried out promptly, and no later than two years after the ordinances come into force; and
In the case of legal entities that are established or registered after the FinCEN regulations come into force, the reports must be submitted at the time of formation or registration.
In addition, a reporting company must update the information provided to FinCEN in the event of a change in beneficial ownership within one year of the change.
For the purposes of the CTA, the reporting requirements apply to any company that is a “reporting company”. The CTA defines this term as: “a corporation, limited liability company, or other similar entity“Created by filing a document with the state or Native American tribe, or incorporated as a foreign legal entity registered for business in the United States. The definition expressly excludes an extensive list of entities (a total of 24 listed). Among the excluded are the most famous:
Listed companies (subject to SEC regulations);
Companies with 20+ full-time employees in the United States who work from a physical office in the United States AND who have filed a tax return demonstrating greater than $ 5 million in gross income / sales; and
Dormant companies that have been in existence for more than a year are not engaged in “active business” AND are not owned (either directly or indirectly) by a non-US Person.
Other exceptions exist for certain financial institutions, charitable foundations, and pooled investment vehicles.
According to the CTA, a “beneficial owner” is an individual who, directly or indirectly, (1) exercises significant control over an enterprise; or (2) owns or controls at least 25 percent of the ownership interest in any company.
There are five exceptions to the concept of “beneficial owner”:
A minor child if the information is otherwise properly reported to the child’s parent or guardian;
A person acting on behalf of another person as an agent, agent, custodian or agent;
A person acting as an employee whose control is inferred solely on the basis of their employment status;
A natural person whose only interest in the unit is a right of inheritance; and
A creditor of the legal entity unless the obligee meets the requirements of a beneficial owner.
As the year-long anniversary of the CTA’s enactment approaches, it would be important for small business owners or entrepreneurs planning to start new businesses to pay close attention to the FinCEN’s publication on the CTA regulations.