UNCLE SAM WANTS TO KNOW: WHO ARE YOUR OWNERS? (UPDATED 3-4-21)

By Charles D. Pulman on March 3, 2021

The 2021 year has brought many new developments, including, and most importantly, a new federal law that will require small, privately-owned companies to report their ultimate individual owners to the federal government. This new law, which was enacted on January 1, 2021, is known as the Corporate Transparency Act (“CTA”).

CTA reporting requirements will not become effective until after regulations are issued by the federal government further interpreting and clarifying CTA. Until those regulations are issued, we will not know the answer to many questions raised in CTA. CTA requires that regulations be issued by the Secretary of Treasury within one (1) year after the date of enactment of CTA, which was January 1, 2021.

The purpose of this Blog is to give a brief overview of CTA as currently written but with acknowledgment that the implementation and breadth of CTA will not be known until the regulations are issued.

In general, CTA requires that the “reporting company” file with FinCEN (Financial Crimes Enforcement Network of the Department of Treasury) a report that identifies each “beneficial owner” of the reporting company and the “applicant” of the reporting company. The following information is required for these persons: full legal name, date of birth, current address and unique identifying number (i.e., passport, drivers license).

These reports will be due at the time a new entity is formed after the issuance of the regulations. For entities existing on the date the regulations are issued, the report is due two years after the date the regulations are issued.

Several terms used in the CTA are defined as follows:

A. Beneficial Owner means an individual who, directly or indirectly, exercises “substantial control” over the company or owns or controls at least 25% of the ownership interest in the company. Several types of individuals are excluded, including minor children, nominees, employees, potential heirs and creditors.

B. Applicant means any individual who files an application to form a corporation, limited liability company or other similar entity under the laws of the State or Indian Tribe. In addition, the term includes an individual who registers or files an application to register any such entities under the laws of a foreign country to do business in the US.

C. Reporting Company is defined as a corporation, limited liability company or other similar entity that is (i) created by filing a document with the Secretary of State or a similar office of the State or Indian Tribe or (ii) formed under the laws of a foreign country and registered to do business in the United States by filing a document with such offices.

(1) A reporting company does not include many listed types of companies, including public companies, political entities, banks, credit unions, investment companies, investment advisors, insurance companies, public accounting firms, public utilities, charitable organizations, political organizations and certain inactive companies.

(2) Of particular interest, certain "large" companies are excluded as a reporting company. An “excluded company” is an entity that (a) employs more than 20 fulltime employees in the United States, (b) filed in the previous year federal income tax returns showing no more than $5,000,000 in gross receipts or sales (including receipts or sales of other entities owned by the reporting company and other entities in which the reporting company operates) and (c) has an operating presence at a physical office in the United States.

As mentioned above, the reporting requirements apply at the time the reporting company is formed or registered, which raises interesting questions as to how a newly-formed company would ever qualify as an “excluded” company since at the time of registration or formation, the company has not filed a prior year federal tax return or had gross receipts of any amount. Perhaps regulations will add some clarification so as to not render this exclusion meaningless at the time of formation or registration of a new company.

In addition, the reporting company is required to file updated reports with FinCEN within 1 year after there is a change in the information previously provided to FinCEN by the reporting company. Again, regulations will be needed to further clarify this requirement.

CTA provides that the information provided to FinCEN is to be kept confidential and not disclosed but there are exceptions (as expected). Those exceptions include (i) disclosure to another federal agency engaged in national security, intelligence or law enforcement; (ii) disclosure to a State, Local or Tribal law enforcement agency; (iii) disclosure to certain foreign countries under certain circumstances; and (iv) disclosure to certain financial institutions.

It is interesting to note that CTA permitted disclosures do not require prior court approval but are subject to “protocols” that apparently will be issued by the Department of Treasury through regulations. (That should make everyone sleep better.)

CTA includes penalties for willfully providing false or fraudulent information or willfully failing to report or update information or knowingly disclosing information. The penalties are both civil and criminal.

CTA was adopted to address money laundering and the use of shell companies in transactions. Unfortunately, the breadth of CTA will sweep in many, many businesses that never previously had an obligation to disclose ownership to a governmental entity.

While present law does require ownership disclosure to banks and financial institutions, those disclosures are made to a non-governmental entity that is subject to its own privacy rules. After CTA, it seems that every newly-formed company that files an organizational document with a Secretary of State will have to file the FinCEN report, which obligation apparently will fall on the “applicant” who is the person who files the organizational document, such as the Certificate of Formation, with the Secretary of State.

In addition, CTA compliance will require companies to maintain internal controls to monitor changes of ownership and to report changes of ownership timely.

Until regulations are issued by the Department of Treasury, many questions exist regarding CTA and its procedures and implementation. But there is one thing for sure: Uncle Sam wants to know who your individual owners are, including individuals who are owners of tiered entities.

If you have any questions regarding this blog post or any other tax-related matter, please contact Charles Pulman at (214) 749-2447 or cpulman@meadowscollier.com.