INTRODUCTION

Because most U.S. States do not require information about the beneficial owners of an entity, and with more than two million entities being formed in the U.S. each year, it was about time for Congress to enact a law that mandates disclosure of the identity of the ultimate beneficial owners and the persons who maintain substantial control of private entities.

Aimed at curbing money laundering, terrorism financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and similar activities, Congress enacted the Corporate Transparency Act ("C.T.A.") on January 1, 2021. The D.T.A. became fully effective from January 1, 2024. It requires certain domestic and foreign entities to disclose to the Financial Crimes Enforcement Network ("FinCEN"), a division of the U.S. Treasury Department, the identity of their beneficial owners and control persons. A failure to do so can attract heavy penalties.

The targets of the C.T.A. are much like Matryoshka dolls, having many layers between what appears on the surface and what exists at the heart. Congress intended to unravel the identity of the ultimate beneficial owners by peeling one layer at a time, thereby requiring the lowest tier entity to disclose the identity of the individuals that control the company.

This article serves as a primer to the C.T.A., asking questions and providing answers.

WHO IS REQUIRED TO REPORT UNDER THE C.T.A.?

Briefly, any entity that is either organized in the U.S. or a foreign entity that is registered to conduct business in the U.S. is required to report certain specific information about its (a) individual ultimate beneficial owners and (b) individuals who assisted either in the formation of the entity or obtaining the registration to conduct business in the U.S.

General Definition

A Reporting Company has been broadly defined to mean the either of the following:1

  1. A domestic Reporting Company. This is defined to mean any of the following entities:

    1. A corporation
    2. A limited liability company
    3. An entity that is created by the filing of a document with a secretary of state of one of the states or any similar office under the law of a State or Indian tribe

  2. A foreign Reporting Company. This is defined to mean a company that meets the following criteria:

    1. It is a corporation, limited liability company, or other entity.
    2. It is formed under the law of a foreign country.
    3. It is registered to do business in any U.S. State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

Exemption for Heavily Regulated Entities

Companies that are subject to substantial reporting requirements under another Federal statute are exempt from the reporting under the C.T.A. Examples include the following:2

  1. Entities registered with the Securities Exchange Commission. Examples include the following

    1. Publicly traded companies (registered securities issuers)
    2. Brokers or dealers in securities
    3. Securities exchanges or clearing companies; money services businesses
    4. Other Exchange Act registered entities
    5. Investment companies or investment advisers
    6. Venture capital fund advisers
    7. Commodity Exchange Act registered entities

  2. Entities in the Financial and Insurance sector that are regulated businesses. Examples include the following:

    1. Banks
    2. Credit unions
    3. Depository institution holding companies
    4. Insurance companies
    5. State-licensed insurance producers
    6. Pooled investment vehicles
    7. Financial market utilities

  3. Governmental authorities and political subdivisions
  4. Inactive Entities3
  5. Large Operating Entities4
  6. Public accounting firms registered under the Sarbanes-Oxley Act
  7. A public utility that provides telecommunications services, electrical power, natural gas, or water and sewer services within the U.S.
  8. Any entity that is controlled or wholly owned, directly or indirectly, by one or more entities that are otherwise exempt in the above categories.

WHAT IS A REPORTING COMPANY REQUIRED TO REPORT UNDER THE C.T.A.?

An entity meeting the definition of a Reporting Company is required to file a beneficial Ownership Interest report ("B.O.I. Report") to report certain information about itself, its Beneficial Owners, and Company Applicants.5

Information About the Reporting Company

The report must include the following:

  1. The Reporting Company's full legal name
  2. Any trade names it uses
  3. Its business address
  4. Its I.R.S. tax identification number

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Footnotes

1. 31 U.S. Code § 5336(a)(11)(A); 31 CFR 1010.380(c)(1).

2. 31 U.S. Code § 5336(a)(11)(B).

3. 31 CFR 1010.380(c)(2)(xxiii). An inactive entity is any entity that (a) was in existence prior to January 1, 2020, (b) is not engaged in an active business, (c) is not owned by a foreign person (directly or indirectly, in whole or in part), (d) has had no changes in ownership during prior 12 months, (e) has not sent or received funds greater than $1,000 in the prior 12 months, and (f) does not hold any assets in the U.S. or otherwise, including any ownership interests in other entities.

4. 31 CFR 1010.380(c)(2)(xxi). A Large Operating Entity is any entity that (a) has an operating presence at a physical location in the U.S.; (b) employs more than 20 full-time employees; and (c) has filed a federal tax return for the previous year showing more than $5,000,000 of gross receipts.

5. The terms "Beneficial Owner" and "Company Applicant" have been defined below in detail.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.