On January 1, 2021, Congress enacted the National Defense Authorization Act of 2021. From strictly reading the title of the act, one might not realize the significance of its impact on the corporate world as we all know it. However, comprising a small portion of the act and as part of the Anti-Money Laundering Act of 2020, Congress enacted what we now know as the Corporate Transparency Act (“CTA”). This article provides an overview of what the CTA entails, what constitutes a beneficial owner, the applicability and reporting requirements under the CTA for beneficial owners and reporting companies, and potential obstacles or issues related to the CTA.
Reporting Companies and Reporting Requirements
Essentially, if an entity formed or registered to conduct business in the United States had to file a document for its creation or registration with a state government within the United States, the CTA requires it to file a Beneficial Ownership Information (“BOI”) report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The entities subject to the CTA include most privately held corporations, limited liability companies, limited partnerships, and other similar entities, regardless of whether they are domestic or foreign (collectively, “Reporting Companies”), and the BOI report Reporting Companies must file provide certain information about the reporting company’s owners, management and the individuals who assisted in the company’s creation.
A reporting company must provide its full legal name, any DBA name, its complete current address, the jurisdiction of formation or registration in which it is located, and its federal taxpayer identification number or other unique tax identification number. The CTA does specifically include 23 exemptions to its definition of “reporting company,” which includes, among other things, certain tax-exempt entities that are specified in the final rule implementing the reporting requirements and further described in FinCEN’s Small Entity Compliance Guide.
Beneficial Owners and Information Requirements
The CTA defines beneficial owners as individuals who, directly or indirectly, either exercise substantial control over a Reporting Company or own or control at least 25% of the ownership interests of a Reporting Company. The definition of “substantial control” is fairly vague; however, it includes any person who (1) exercises authority as a senior officer of the Reporting Company, regardless of title; (2) has authority to appoint or remove a senior officer or a majority of the board of directors; (3) directs, determines or has substantial influence over “important matters” (e.g., finance, business, structure); or (4) has any other form of substantial control over the Reporting Company besides those listed. You probably qualify as a beneficial owner of the reporting company and should report your BOI unless you clearly do not meet the guidelines above or are a minor child (parents or guardians are required to report in this instance), a nominee, an employee who is not a senior officer, a future inheritor or a creditor. Each beneficial owner must provide their full legal name, date of birth, complete current address, unique identifying number (e.g., passport or driver’s license number), and an image of the document holding your unique identifying number.
How Does This Affect Your Business?
Although extensive and possibly time consuming, the actual CTA reporting is fairly simple. However, companies should consider implementing processes and procedures to monitor future changes in its beneficial owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN. Keeping current with the information FinCEN requires will be a significant trap for Reporting Companies as they will need to rely on beneficial owners to update them on reportable changes to their information (e.g., ownership changes, moves, marriages, divorces, etc.) in a timely manner. Reporting Companies must file updated or corrected reports within 30 days of reportable changes or discovery of inaccurate information in previously filed reports. Willful failure to report, complete or update BOI or the willful submission of or attempt to provide false or fraudulent BOI can result in severe penalties, both civil and criminal. Thus, incorporating certain provisions related to the CTA and keeping an eye on any updates will benefit your company and position it to ensure compliance.
Given the number of questions since the implantation of the CTA, FinCEN has created a “Frequently Asked Questions” section on its website, which it updates on a regular basis. This section is very informative and a good resource for all business entities and owners.
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About the authors:
Chris Sloan is a shareholder in Baker Donelson’s Nashville, Tennessee, office and chair of the firm’s Emerging Companies Group. He focuses his practice on startups and other emerging businesses and handles complex software and other IT transactions for companies of all sizes. He may be reached at csloan@bakerdonelson.com.
Meagan O. Davis, an associate in Baker Donelson’s Memphis, Tennessee, office, assists clients with mergers and acquisitions, corporate governance and contract review matters, as well as securities offerings, federal and state regulatory filings, and the forming and structuring of business organizations. She may be reached at modavis@bakerdonelson.com.
