On January 1, 2021, as part of the federal Anti-Money Laundering Act (the “AMLA”), Congress enacted the Corporate Transparency Act (the “CTA”) in an effort to increase corporate transparency. The CTA requires certain companies to file information on their businesses, including “beneficial ownership” information, with the Financial Crimes Enforcement Network (“FinCEN”). The impact of the CTA on companies and those who would be required to report information has not been clear. However, on December 7, 2021, FinCEN issued a Notice of Proposed Rulemaking to establish the regulations that would implement the CTA, and provide additional clarity on which businesses would be considered “reporting companies” under the CTA.

Which companies are subject to reporting requirements?

Almost all types of domestic and foreign business entities are included in the CTA’s definition of “reporting companies”. This includes limited liability companies and corporations. That being said, the CTA allows for a number of exemptions for companies that will not be required to make CTA filings. However, these exemptions apply only to large entities and entities that are already subject to various reporting requirements due to size or industry regulations.

Companies that are considered “large operating companies” are not required to make filings under the CTA. The proposed rules clarify that “large operating companies” are those that: (1) employ more than 20 employees on a full-time basis in the United States; (2) filed Federal income tax returns in the prior year demonstrating more than $5,000,000 in gross receipts or sales in the aggregate (including receipts or sales from entities owned by the entity and through which the entity operates); and (3) has an operating presence at a physical office within the United States. The CTA additionally does not require filings for subsidiaries of exempted entities, meaning entities whose ownership interests are entirely owned or controlled by an exempt entity. Subsidiary entities that are partially-owned by exempt entities, are, however, not exempted.

What does a reporting company have to report?

Reporting entities will be required to disclose basic information regarding the entity itself, including the company’s full name, any trade name (or D/B/A), business street address(es), the jurisdiction of formation, and taxpayer identification information (EIN). In addition to entity information, reporting entities are required to report information on their beneficial owners. Meaning that each reporting entity will be required to report the name, birthdate, address, and unique identifying number from an acceptable identification document (such as a passport or driver’s license) with an image of the document. The beneficial owner information must be provided for each company applicant and beneficial owner of the entity. Beneficial owners are defined by the CTA as “any individual who, directly or indirectly” exercises “substantial control” over the reporting company or “owns or controls” at least 25% of the “ownership interests” of the reporting company.” 

While the CTA doesn’t define “substantial control” or “ownership interests,” the proposed regulation clarifies that “substantial control” is viewed through the lens of three specific indicators: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any officer or dominant majority of the board of directors of a reporting company; (3) direction, determination or decision of, or substantial influence over important matters of a reporting company (e.g. sale, lease or transfer of principal assets of the company, entry into or termination of major contracts, major expenditures and investments, compensation of senior officers). The proposed regulations also take an expansive view of what constitutes an “ownership interest” to include both equity in the reporting company and other types of interests, such as capital or profits interests, convertible instruments, warrants or rights, or other options to acquire equity, capital, or other interests in a reporting company.

When do reporting companies have to report their information?

When reporting companies are required to comply with the CTA depends on the date of the company formation. After FinCEN’s regulations become final, new reporting companies will be required to report the information about their beneficial owners upon formation or within fourteen days thereof. Any existing company formed prior to the effectiveness of the FinCEN regulations will be required to report its information within two years of the promulgation of the new regulations. Reporting companies will also need to update their information within a year of any change of beneficial ownership.

Who will be able to see and access information regarding beneficial ownership?

The beneficial owners of consumer facing companies may be concerned about the accessibility of their personal information given the reporting requirements. This concern is largely unfounded, however. The reporting information will be kept in a secure, private, database maintained by FinCEN. The database of reporting information will not be publicly available, and ownership information will be available upon requests only from federal law enforcement agencies; state, local, or tribal law enforcement agencies authorized by court order; a federal agency on behalf of a foreign country if such request is pursuant to an international agreement; or a financial institution for customer due diligence purposes authorized by the reporting company.

The current proposed rulemaking is one of three to implement the CTA. Companies should begin evaluating whether they will fall within the reporting requirements and who within their entity structure may be considered a beneficial owner based on this initial proposed rulemaking.