Client Alert: The Corporate Transparency Act Is Almost Here

September 12, 2023

On January 1, 2021, Congress passed the Corporate Transparency Act (CTA), one of the more sweeping and comprehensive changes to efforts to combat money laundering, terrorism financing, organized crime, and other financial crimes since the passage of the USA PATRIOT Act in 2001.

The CTA requires (i) the establishment of new federal beneficial ownership reporting requirements for certain U.S. domiciled or active entities, including foreign entities that operate in the U.S., and (ii) FinCEN’s maintenance of a federal database for the beneficial ownership information collected. The CTA applies to all “reporting companies” and their “beneficiary owners.”

What is a “reporting company”?

The term “reporting company” means, subject to certain exceptions, “a corporation, limited liability company, or other similar entity” that is (i) created by the filing of a document with the secretary of state or similar office under the laws of a state or Indian tribe or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with the secretary of state or similar office under the laws of a state or Indian tribe. This includes all limited liability companies, limited partnerships, and corporations.

The exceptions generally relate to companies that are otherwise required to report to a federal agency, such as banks and investment companies. There is also a “large operating company exemption,” which exempts companies that 1) employ more than 20 employees on a full-time basis in the U.S.; 2) filed in the previous year Federal income tax returns in the U.S. demonstrating more than $5 million in gross receipts or sales in the aggregate; and 3) have an operating presence at a physical office within the U.S.

Who is a “beneficial owner”?

The CTA defines “beneficial owner” to mean, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationships, or otherwise, (i) exercises “substantial control” over the entity or (ii) owns or controls not less than 25% of the ownership interests of the entity. This definition also has some exceptions, such as for minors (but the information of a parent of such minor must then be reported).

The regulations carrying out the CTA set forth three specific indicators of “substantial control”: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination, or decision of, or substantial influence over, important decisions made by a reporting company.

Company Applicants

The CTA and its regulations also require reporting of information for the “company applicant.” The statute defines the applicant as the person who files the document that forms the entity (i.e., Articles of Incorporation). The regulations provide that the term company “applicant” also includes the individual who is “primarily responsible” for directing or controlling such filing if more than one individual is involved in the filing.

What information must be report?

Reporting Companies

The following information must be reported for each reporting company:

the full legal name of the reporting company;
any trade name or “doing business as” name of the reporting company;
the business street address of the reporting company;
the state or Tribal jurisdiction of formation of the reporting company (and for a foreign reporting company, the state or Tribal jurisdiction where such company first registers); and
an IRS TIN of the reporting company (or, of a foreign company, a foreign tax identification number).

Beneficial Owners and Applicants

The following information must be reported for each beneficial owner and applicant:

full legal name;
date of birth;
complete current address, which FinCEN clarifies as:

- For a company applicant who provides a business service as a corporate or formation agent, the business street address; or
- For all other cases, the residential street address that the individual uses for tax residency purposes;

Conclusion

The CTA is ushering in a new era of transparency with respect to U.S. entities, and it is nearly upon us. Clients who may be beneficial owners of reporting companies should be ready for this, and we will be here to help. Please reach out to us at Croke Fairchild Duarte & Beres with any questions about compliance with the CTA’s requirements.

This client alert was prepared by: