US Corporate Transparency Act (CTA): Pants on Fire for US Advisors

While Europeans have lived with ultimate beneficial disclosure to their national governments for many years, such disclosure is only now coming to the US. Beginning on January 1, 2024, US advisors to most small, closely-held entities will have to advise their US and foreign clients on how to comply with the far-reaching Corporate Transparency Act (“CTA”) rules. 

Most entities doing business in or with the US subject to new, invasive reporting requirements

The CTA applies both to US entities and foreign entities doing business in the US. The CTA will likely have significant ramifications for domestic and foreign businesses as it imposes new reporting burdens on such entities, requiring a fact-specific analysis of each entity’s unique circumstances. Information sharing of the CTA database will also open the door to expanded risks of government enforcement and investigations to businesses and individuals who run those businesses.

The US implemented the CTA in response to pressure from the European Union to combat the use of shell companies and other entities to facilitate money laundering and other illicit activities. The CTA requires domestic and foreign “Reporting Companies” to report certain identifying information about their ultimate beneficial owners (human beings) to the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN). 

FinCEN estimates that over 32.5 million Reporting Companies will be subject to these reporting rules when they take effect and that an additional 5 million entities will become Reporting Companies each year thereafter.

The applicability of the CTA reporting regime is determined on an entity-by-entity basis. For Reporting Companies currently in existence, FinCEN requires the provision of beneficial owner information (BOI) before January 1, 2025. For Reporting Companies formed or registered on or after January 1. 2024, reporting is required within 30 days of the acceptance of the company’s formation or registration filing. 

Falling foul of the rules is easy, and the penalties for doing so are harsh

Most problematic is that a change in beneficial ownership (such as a name change or change of home address) or a change in exemption status would also need reporting to FinCEN within 30 days of such change. Reporting Companies should now give consideration to their internal systems for gathering, reporting, and safeguarding the privacy of BOI to be reported to FinCEN.

Most, if not all, small businesses will be subject to the new rules (other than proprietorships and general partnerships), including “business” entities that are formed as part of what most practitioners consider regular, everyday estate or wealth planning. For example:

• The couple who purchases a weekend home but uses an LLC to insulate themselves from liability for anything occurring on the property will be subject to these rules.
• The group of siblings who inherit a family compound together and create an LLC to govern co-ownership more easily will be subject to the new rules.

Although there are exemptions to the rules, there are no exemptions for entities such as the above. Most importantly, there are no extensions for late filing, and there is no good faith or substantial compliance relief for late fillings.

Indeed, while there is an exemption for very large entities, there is no exemption for very small entities, even if there is no gross income. There are significant civil and criminal penalties for failing to comply, so entity owners or those controlling these entities need to be aware of these developments.

To whom should affected entities entrust the proper filing of reports?

Crucially, the reporting requirement is not a one-time event. There is an “initial” reporting requirement and then “ongoing” reporting requirements if there is a change, e.g., a control person moves to a new home address, or perhaps a new manager is named for an LLC, and that might have to be reported as a change in control persons. 

These rules will impact anyone who has a US connection. A critical issue for all BOI filers will be who they will make responsible for handling the required filing:

• Corporate filing services that assist in the formation of entities and serve as registered agents may try to expand to meet the new CTA filings as yet another service they offer.
• CPAs may try to assist in the CTA reporting but may not have the information or expertise for all aspects of this.
• Wealth advisory firms might expand the scope of services they offer.

However, US attorneys will have the most relevant expertise. In addition to handling the filings, US lawyers will also be able to identify other legal matters that need attention (e.g., an update of the entity governing documents). This article is intended to provide practitioners a quick guide to the basics and some ideas for how to help clients. 

As noted, the purpose of the CTA is to create a national database of companies in the US that identifies the “human beings” behind the companies (both owners and those in control of the entities). The law is part of an increasing effort to combat money laundering, terrorism, tax evasion, and other financial crimes.

Congress intended to help law enforcement by creating this national database that would allow law enforcement to sift through so-called “shell companies” used for nefarious purposes. These rules are very different from any reporting that clients with a US connection have faced previously (e.g., annual reports to states where the entity is formed and income tax returns).

Because the reporting requirements are quite different from income tax returns, clients’ CPAs may not be able to – or perhaps may not be willing to – handle these filings. These rules and reports will be uncomfortable as well as burdensome. 

Those with BOI filing obligations may have to disclose their names and home addresses to comply with the rules, even if they do not actually own an interest in a company. Many will find these disclosures invasive and a further erosion of whatever limited privacy they believed they still had. 

Which companies are subject to the reporting requirements as Reporting Companies?

The CTA requires that “Reporting Companies” file certain “Beneficial Owner Reports.” Any entity that is created by filing paperwork with a Secretary of State (or tribal jurisdiction) is a “Reporting Company” unless the company meets one of the limited exceptions to avoid reporting. 

Common examples of reporting entities are LLCs, which are formed by filing articles of organization with a state, or corporations, which are formed by filing articles of incorporation with a state. These would include, for example,

• an LLC that holds rental real estate as part of an estate plan or asset protection plan;
• a professional corporation that holds a dental, medical, legal, or other professional practice; and
• a corporation that holds the family business (unless it meets the large company exception).  

Exceptions include charities, large companies (20 or more employees and $5 million or more in revenues), and certain types of other entities that are already subject to significant government regulation (e.g., banks).

What will have to be reported? 

Reporting Companies will have to file reports containing information regarding the company and any individual who is a “beneficial owner.” The information that will have to be included in company reports includes: 

• Legal name and any trade names; 
• Street address for company’s principal place of business (not a P.O. box or lawyer or other adviser’s address); 
• State of formation;
• Tax Identification Number. A pass-through entity, like a single-member LLC that doesn’t have a tax identification number, may have to obtain and provide a unique identifying number. 
• An identifying document from an issuing jurisdiction (e.g., a certificate of incorporation) and the image of that document. 

The CTA provides that Reporting Companies will also have to file reports for “beneficial owners.” This is a term defined by the CTA that has broad and, for now, uncertain reach. The information to be reported for each beneficial owner will consist of: 

• Full legal name. This requires the “full legal name” not initials. 
• Date of birth.
• Home address (not a P.O. box or lawyer or other adviser’s address). 
• PDF (photocopy) of the individual’s US or foreign passport or state driver’s license. 

BOI filers should understand that the above information for many entities will be more personal and invasive than the information they have previously disclosed to the US government, and many will be quite uncomfortable with these requirements. 

For BOIs used to sending all entity information c/o their attorney, wealth adviser, or business to avoid personal disclosures, the initial response may be to again disclose in that manner, which will not suffice for the CTA. 

The concept of a beneficial owner is rather complicated. In broad terms, a beneficial owner is anyone who owns at least 25% of the company or who has substantial control over the company. All officers are beneficial owners by default, even those who own no equity in the entity.

For example, is the CFO of an entity a control person? What about the head of a family office that manages family entities even though they are not a manager, or an LLC or officer/director of a family corporation? There still are significant questions about who is considered a beneficial owner of a trust that owns a reporting company. 

Trusts, except those formed under a specific state statute that requires a filing with the state to be formed, are themselves not reporting companies because a trust can be formed without any state law filing. A trust that is a beneficial owner of a company, however, will be included in a beneficial information report by virtue of being a beneficial owner.

In that situation, who is identified as the beneficial owner? It seems certain that it is the trustee. What about the investment trustee or an investment adviser of a trust that has fiduciary responsibility for whether the trust continues to hold that entity? 

What about a trust protector? And if a trust protector may be deemed a control person, will that decision vary depending on the actual powers given to a particular trust protector? Each of these people may also be deemed control persons and, hence, one, some, or all may be beneficial owners required to report. 

FinCEN, which is a bureau of the United States Treasury Department charged with the enforcement of the CTA, has indicated that it will publish reporting forms that can be used to comply with the obligations under these reporting rules. One can only hope that FinCEN will issue additional guidance, perhaps in the form of several FAQs.

Given the significance of the CTA reporting requirements, it may take time for BOI filers to understand the rules and what actions they will have to take. Determining reporting obligations and exemption eligibility is a fact-specific analysis that will need to be performed for each BOI filer’s unique entity circumstances. 

Moreover, monitoring of an entity’s operation and ownership will be ongoing as a change in operations, like a change in name or change in home address, may change reporting status and require updating to FinCEN.

Given the penalties for non-compliance and the wide sweep of the CTA, anyone, American or foreign, who has any involvement with any type of US entity should immediately contact competent US counsel to advise on their new reporting obligations – and comply with them!

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