If you are a member in an LLC, a partner in an LP or LLLP, a shareholder in a corporation, or an owner in any other business entity, the new Corporate Transparency Act (“CTA”) applies to you!

Passed in January 2021 after a decade of congressional efforts, this new federal law aims to combat money laundering activities, terrorist financing, tax fraud and evasion, and other corruption by discouraging the use of shell companies.

Until now, the collection of business entity ownership information fell to financial institutions and their due diligence requirements when opening new business accounts. Once the CTA’s regulations are fully approved and published, this burden will shift to the businesses themselves. All US business entities will be required to report information about its owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

(The public comment period ends on February 7, 2022, and the final regulations will come after that; the information presented below, therefore, is current as of this writing and may change.)

WHO MUST REPORT?

Any corporation, limited liability company, limited partnership or similar entity which is created by filing with a secretary of state (or similar office, such as the Arizona Corporation Commission) or is formed in a foreign country and registered to do business in the United States must comply with the requirements.

WHAT INFORMATION MUST BE REPORTED?

Information must be reported concerning all “beneficial owners” of the entity. Under the CTA, a beneficial owner is defined as any individual who directly or indirectly exercises substantial control over an entity AND owns or controls at least 25% of the ownership interest in the company. The information required to be reported for each beneficial owner includes:

• Full name
• Date of birth
• Current address
• A unique identifying number, such as a passport, driver's license, or FinCEN identifier.

WHEN MUST COMPANIES REPORT?

Under the current proposed guidelines, the timeline for reporting would begin on the date the regulations are finalized. Companies created before the effective date of the final regulation would have one (1) year to file their initial reports; companies created or registered after the effective date would have 14 days after their formation to file.

Reporting companies would have 30 days to file updates to their previously filed reports, and 14 days to correct inaccurate reports after they discover or should have discovered the reported information is inaccurate.

WHAT ENTITIES ARE EXEMPT?

Certain business entities already report the above information to the federal government and are exempt from the CTA requirements. The exempt entities include:

• Publicly traded companies that are subject to SEC regulations
• Companies (i) employing more than 20 full-time employees in the United States, (ii) operating from a physical office in the United States, AND (iii) having more than $5 million in gross receipts/sales, as shown on a tax return
• Dormant companies which (i) have been in existence for more than one year, (ii) are not engaged in active business, AND (iii) are not owned (either directly or indirectly) by a non-U.S. individual
• Additional exceptions apply to certain financial institutions and charitable trusts

WHAT ARE THE PENALTIES FOR NON-COMPLIANCE?

The objective of the CTA cannot be realized if business owners do not to comply with the requirements. The penalties are stiff. An individual who fails to meet the reporting standards may face civil penalties of up to $500 per day. An individual who willfully provides or attempts to provide false or fraudulent information, or willfully fails to provide FinCEN with the requisite information, may face criminal fines up to $10,000 and/or imprisonment for up to two years.

WHO WILL HAVE ACCESS TO THE INFORMATION?

Clearly, there are legitimate concerns about the privacy of the reported information. The information will not be publicly available, and the CTA requires the Treasury Department to establish confidentiality and security protocols. FinCEN is authorized to disclose the information to:

• U.S. federal law enforcement, national security, and intelligence agencies
• Certain other enforcement agencies, with court approval
• Non-U.S. law enforcement agencies, prosecutors or judges based upon a request of a U.S. federal law enforcement agency
• Financial institutions and their regulators, with consent of the reporting company

NEXT STEPS?

Once the regulations are finalized and the reporting procedures are published, beneficial owners of current legal entities will need to report their information within one year. If your company has experienced changes in ownership through sales of shares or membership interests, or through probate or trust administration, begin to identify all individuals who will be considered beneficial owners so as not to delay your required reporting.

The LAW OFFICE OF WENDY ANDERSON will be available to assist with any questions you may have about the law and with the reporting process itself. 

NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.

By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC
480-825-4509
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