By: Shahzeb Gaziani, Estate Planning Attorney

The Corporate Transparency Act is something you need to know about if:

• You own a small business (LLC, Corporation, etc.); and
• Your small business has 20 or fewer full-time employees and less than $5 million in revenue

On January 1, 2021, Congress enacted new anti-money laundering legislation known as the Anti-Money Laundering Act of 2020. This legislation included the Corporate Transparency Act which directs the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish and maintain a registry of owners for certain entities. The purpose is to make the identity of bad actors trying to conceal their ownership in various shell companies that facilitate illicit and illegal activities transparent.  FinCEN, a federal agency that collects and analyzes financial data, will store the reported information in a secure and confidential database. The database will only be accessible to authorized users, such as law enforcement agencies and financial institutions. FinCEN will also issue rules and guidelines to implement and enforce the law.

Who does it apply to?

If you are classified as a “Reporting Company” under the Corporate Transparency Act, you must report the information for the company’s “Beneficial Owners”.  A Reporting Company is any domestic or foreign corporation, limited liability company, or similar entity that was either formed or registered to do business in any state or jurisdiction by filing a document with a secretary of state or other similar office and which does not qualify for an exemption. However, there are many exceptions to reporting for already regulated or transparent entities. This includes public companies, banks, insurance companies, charities, and businesses that have more than 20 employees and $5 million in revenue. 

What information needs to be provided?

The entities and individuals covered by the law must report the names, dates of birth, addresses, and identification numbers (such as passports or driver’s licenses) of their beneficial owners and company applicants.

A beneficial owner is one who either owns or controls 25% of the ownership interest of a reporting company or who has substantial control over a reporting company.  

Substantial control can be determined by a few factors including: 

• (i) Serving as an officer of a reporting company, 
• (ii) having authority over senior officers or majority of the board of a reporting company,
• (iii) having substantial influence over the reporting company’s important decisions; or 
• (iv) having some other type of substantial control over a reporting company.

A Company Applicant is any individual applies to form or register an entity under the laws of a state. This means that if a family member files a document registering an entity on behalf of a relative, both the family member and relative are considered company applicants.  Additionally, if you are a law firm or accountant (or you hired one) who filed to incorporate an entity on behalf of a client, you may need to report as a company applicant. Current commentary and regulations seem to exempt company applicants for entities created before 2024 from having to be disclosed.  

What about Trusts?

Certain entities that are formed without the need to file documents with a governmental entity are not covered under the corporate transparency act.  This includes trusts, which cannot be considered a beneficial owner because only individuals can be a beneficial owner. Additionally, a beneficial owner is not someone whose only interest in an entity is through a right of inheritance.  However, upon inheritance occurring, they may be a beneficial owner.  

That said, individuals who own or control an interest in a reporting company through a trust can be subject to the Corporate Transparency Act.  This includes a trustee of a trust along with those individuals who have the authority to dispose of trust assets.  Additionally, a beneficiary who is the beneficiary of trust income and principal or has the right to demand a distribution or withdrawal of all the assets of the trust may be deemed a beneficial owner.  Also, a grantor who retains the right to revoke a trust or withdraw trust assets might be deemed a beneficial owner.  As such, if a trust owns an interest in a reporting company, it may result in the individuals involved with the trust being subject to the Corporate Transparency Act.  

What is required?

A Reporting Company must report the names, dates of birth, addresses, and identification numbers (such as passports or driver’s licenses) of their beneficial owners and company applicants.

When will the law be enforced?

  The law will take effect on January 1, 2024.  New entities created on or after this date will have 30 days to comply upon being formed.  Entities that were already formed before January 1, 2024 will have one year (until January 1, 2025) to comply.  Additionally, entities must update their information within one year of any changes.

What are the consequences of non-compliance?

Failure to comply with the Corporate Transparency Act can result in steep penalties.  The penalties for failure to comply with the law or for providing false or misleading information include fines of up to $500 per day and imprisonment for up to two years.

Moving Forward

As we approach the new year, it is important for companies to begin the process of compiling information and reviewing internal processes for compliance with the Corporate Transparency Act. Small businesses are encouraged to analyze whether they will need to report information and make adequate preparations to do so in a timely manner. Finally, if you have an entity owned through your trust that would be considered a reporting company under the corporate transparency act, it is important to meet with your estate planning attorney and accountant to determine what actions need to be taken to be in compliance with the new law.  

The portal to report along with the forms are currently unavailable, but FinCEN should be providing those soon. Future updates can be found on FinCEN’s website:  https://www.fincen.gov/. We here at Leight Hilton PLLC pride ourselves in keeping up to date on upcoming changes in the law and will continue to provide updates on changes we believe may be relevant to you.