Congress Passes Corporate Transparency Act: What It Means for You

In most states, you need to provide more identification to obtain a library card than to form a business entity.

This is no exaggeration. Most states allow you to easily form an anonymous limited liability company (LLC) or corporation without revealing the identities of the people who profit from its existence or control its activities—the “beneficial owners.”

To establish the entity, all you have to do is have an organizer sign the articles of incorporation, certificate of formation, or other document you need to file with the secretary of state or similar state agency. The organizer can be an attorney, an LLC or corporate formation firm, or another person with no ownership stake in the entity.

This makes it easy for people to form anonymous shell LLCs and corporations for nefarious purposes, such as money laundering and various forms of tax evasion. It’s likely that many shell LLCs and corporations were formed to obtain fraudulent PPP loans.

This is about to change. In January 2021, Congress passed the Corporate Transparency Act (CTA). This new law, which will go into effect starting in 2022, is designed to end anonymous shell companies.

The CTA requires that many U.S. business entities file beneficial ownership information with the U.S. Department of the Treasury’s financial intelligence unit, the Financial Crimes Enforcement Network (FinCEN).

For the first time, LLCs and corporations will have to provide ownership information to the federal government.

The CTA does not change state law, which governs how corporations and LLCs are formed and run. But it does create a brand-new federal filing requirement for business entities.

The CTA applies to both new and existing LLCs, corporations, and other business entities. So if you have an entity or are thinking about forming one, you need to know about the CTA requirements.

Business Entities Subject to the CTA

The CTA applies to all LLCs, corporations, and similar entities except

• any business entity with more than 20 employees, $5 million in gross receipts, and a physical presence in the U.S.;
• publicly traded corporations and other businesses entities that issue securities registered with the SEC;
• businesses that are already heavily regulated by the federal government, such as investment funds, investment advisors, registered broker-dealers, banks, registered money transmitting businesses, credit unions, insurance companies, and registered public accounting firms;
• dormant companies not owned by foreigners that hold no assets and sent or received less than $1,000 in the prior 12 months;
• nonprofits; and
• any entity owned by an exempt entity.

Why all the exemptions? The CTA’s focus is on the types of companies typically used as shell companies for illegal purposes: new companies without employees, with little or no revenue, and without an office or other physical presence.

But virtually all smaller businesses that form LLCs or corporations, as well as many start-ups, are subject to the CTA. This includes millions of perfectly legitimate businesses.

The CTA also applies to foreign LLCs and corporations that register to do business in the U.S.

CTA Reporting Requirements

Companies subject to the CTA (termed “reporting companies”) will have to report to FinCEN four pieces of information about their beneficial owners:

1. Full legal name
2. Date of birth
3. Residential or business street address
4. Unique identifying number from an acceptable identification document, including a state driver’s license, U.S. passport, or other U.S. state-issued identification document (or a non-U.S. passport number, if the beneficial owner does not hold any U.S.-issued identification documents)

No financial information about the reporting company or its beneficial owners need be provided.

The reporting process will likely involve filing a relatively simple form with FinCEN.

Reporting companies will need to update their beneficial ownership information with FinCEN within one year of any change in the reported information.

A beneficial owner is any individual who:

• owns a 25 percent equity stake in the reporting company, or
• exercises “substantial control” over the reporting company.

The CTA doesn’t define what constitutes “substantial control” over a reporting company. FinCEN will have to define the term in its future regulations on this topic.

But the term “beneficial owner” does not include an agent or intermediary acting for another, an employee of a reporting company, or creditors of the company (unless the creditor controls the company).

The beneficial owner must be an individual—that is, a human being—not another entity. If, for example, LLC Baker owns LLC Able, LLC Baker must provide in the LLC Able disclosure the names and other required information of the humans who are the beneficial owners of LLC Baker.

Who Has Access to the CTA Registry?

FinCEN will establish a beneficial ownership registry containing all the information provided by reporting companies. But this database will not be available to the public. For example, private creditors can’t access it to collect debts against the owners of LLCs and corporations.

FinCEN will be allowed to disclose beneficial ownership information only to

• U.S. federal law enforcement agencies, including the IRS;
• U.S. federal law enforcement agencies requesting information on behalf of a non-U.S. law enforcement agency; and
• (with the consent of the reporting company) financial institutions requesting information in order to meet customer due diligence requirements.

FinCEN is also permitted to disclose beneficial ownership information to state, local, and tribal law enforcement agencies that obtain a court order.

When Does the CTA Take Effect?

FinCEN has until January 2022 to write the regulations needed to implement the CTA. All new LLCs and corporations that are reporting companies will then have to start complying with the law upon their formation. Your state’s secretary of state should inform you about these requirements as part of the business formation process.

Existing reporting companies will need to comply with the CTA by January 2024.

How many filings are we talking about here? Quite a few. Two million new LLCs and corporations are formed each year. And at least five million existing LLCs and corporations will have to comply.

Penalties for Violations of the CTA

If you willfully violate the CTA by failing to file a report or by filing a false report, you are subject to a $500-a-day penalty (up to $10,000) and up to two years’ imprisonment.

The CTA contains a safe harbor from civil or criminal liability for submitting inaccurate information if you submit a corrected report within 90 days.

Takeaways

Here are five things to know from this article:

1. The days of complete anonymity for the owners of LLCs and corporations are coming to an end because Congress has passed the Corporate Transparency Act to help combat the use of shell companies for money laundering and other illegal purposes.

2. Starting in 2022, people forming many new LLCs and corporations will have to provide some basic information about the entity’s real beneficial owners to FinCEN. Existing LLCs and corporations will have until January 2024 to comply.

3. FinCEN will require the name, address, date of birth, and ID information for the individuals who either own over 25 percent of the entity or control the entity.

4. Larger businesses are exempt from the reporting requirements, but smaller businesses and many start-up businesses are not exempt.

5. FinCEN will make the beneficial ownership information registry available only to government agencies for law enforcement purposes. The general public will not have access to it.

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