What the Corporate Transparency Act Means for Small Businesses

June 11, 2023

TL;DR: Another reporting requirement and erosion of “anonymous ownership.”

And now, the rest of the story…

Way back in July 2006, an international body called the Financial Action Task Force on Money Laundering (FATF, for short) called the US on the carpet for its failure to comply with a FATF mandate to enact legislation to collect information about the beneficial owners of legal entities as other members of the FATF had already done.  It gave us until 2008 to do so. We didn’t.  In 2016, the US was chastised again for its failure which represented a “fundamental gap in United States efforts to combat money laundering and terrorist finance.”

The Corporate Transparency Act of 2019 (CTA, for short) was finally enacted by Congress in 2019 in reaction to this criticism.  It requires every corporation and limited liability company to report identifying information about its beneficial owners to FinCEN, the Financial Crimes Enforcement Network of the Department of the Treasury.  We’ll call this “Beneficial Owner Information” or BOI, for short.

The CTA obligates each state’s Secretary of State or agency in charge of registering corporations and LLCs to notify all eligible entities of this requirement.  It also obligates the Secretary of the Treasury to create more specific rules and guidelines around the submission of BOI.  Though entities must begin filing these reports starting January 1, 2024, as of the date of this writing, the Secretary of the Treasury hasn’t yet created these rules and hasn’t built out its Beneficial Ownership Secure System to collect and house BOI.

More specifically, entities created after January 1, 2024 will have to submit their BOI report within thirty days of formation. Existing entities will have until January 1, 2025 to submit their report.

What information is required?

  1. Full legal name
  2. Date of birth
  3. Full residential or business street address
  4. A unique identifying number from a current government-issued ID such as a passport or driver’s license
  5. An image of the ID described in #4

How often must the information be submitted?

Annually, as well as within a certain amount of time after the information changes, to be determined by the Secretary of the Treasury.

Who qualifies as a “beneficial owner”?

This is where more specific guidelines will be very helpful.  As of now, the legislation describes a beneficial owner as “a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise— (i) exercises substantial control over a corporation or limited liability company; (ii) owns 25 percent or more of the equity interests of a corporation or limited liability company; or (iii) receives substantial economic benefits from the assets of a corporation or limited liability company.”  As you might imagine, the portions of this definition I’ve italicized can be interpreted pretty broadly to include key employees, family members of owners, and “silent” partners who are not involved in the day-to-day management but still hold a portion of the entity’s ownership interest.  Stay tuned for updates from the Secretary of the Treasury on the definition of “beneficial owner.”

Who is NOT considered a beneficial owner?

Beneficial owners do not include:

  • Minors,
  • Nominees/agents/custodians (may include registered agents),
  • Someone solely acting as an employee (though the exercise of “substantial control” by an employee may qualify that person as a “beneficial owner”),
  • Someone who only stands to inherit the interest (maybe by way of ownership held in a living trust?), or
  • A creditor of the entity.

Here again, more questions arise about who is exempted from the definition, so we will await details from the Secretary of the Treasury.

Does every entity have to file a report?

It’s pretty safe to err on the side of caution and assume your entity must file a report.  The only entities exempt from filing are already “on the grid” elsewhere with other governmental agencies.  These entities include:

  • Those that are registered with the SEC;
  • Government entities;
  • Banks, credit unions, and bank holding companies (already registered with the FDIC);
  • A broker dealer or investment company which is already registered with the SEC and FINRA;
  • Insurance companies (more specifically defined in Section 2 of the Investment Company Act of 1940 (15 U.S.C. 80a–2));
  • A commodity exchange;
  • A public accounting firm already registered pursuant to Sarbanes-Oxley;
  • A public utility;

And, of interest to a number of our clients:

  • Nonprofit entities that have been granted tax-exempt status by the IRS and whose tax-exempt status is still in effect; and
  • Any business that has 20 or more employees, files tax returns reflecting more than $5m in gross receipts, AND has a physical operating presence within the US.

Who has access to the information?

The way the legislation is written (trust me, I’ve read it) suggests the goal is not to make public any of this BOI.  Instead, the BOI is supposed to only be accessible by request, by law enforcement agencies and, with customer consent, financial institutions, to hinder criminal activity previously shielded by corporations and limited liability companies.  

There do appear to be some decent measures to keep the BOI safeguarded from public access.  Any agency requesting BOI has to demonstrate its investigatory basis for the request, the access to the BOI must be limited to that agency’s authorized users, the agency must maintain an audit trail, every agency that receives BOI must conduct an annual audit to confirm the BOI has been accessed and used appropriately, and FinCEN must conduct an annual audit of EVERY law enforcement agency that has received BOI. FinCEN must also report to Congress the agencies that requested and accessed BOI and the number of times the BOI was accessed. I’d hazard a guess that most law enforcement agencies are strapped for resources, so will only subject themselves to these administrative burdens when they have a compelling reason to request the BOI.  Once they’re on the radar as an agency that’s accessed this information, it creates this whole host of reporting requirements they must follow.

How long is the information retained?

As of now, the legislation contemplates that BOI will be retained by FinCEN until the 5th anniversary of the entity’s dissolution. That timeline probably comfortably covers all statutes of limitations on prosecution of the types of criminal activity this legislation is trying to hinder.

We will keep a close eye on the CTA and the Secretary of the Treasury and, as the details start to come into focus, are happy to provide updates and answer questions about how this legislation impacts your business.