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.