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Corporate Transparency Act Ownership Registrations Must Not Be Overlooked
The U.S. Corporate Transparency Act (CTA) imposes new reporting requirements that may catch domestic and foreign owners of businesses unaware. There are substantial civil and criminal penalties that may be imposed for failure to comply with these reporting requirements or providing false or fraudulent information.
By Wesley Yang, CPA
On Jan. 1, 2021, the U.S. Congress passed the Corporate Transparency Act (CTA), which imposes new reporting requirements that may catch domestic and foreign owners of businesses unaware. The CTA provides for the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish a registry of beneficial ownership of all domestic and foreign companies. The owners of such entities must disclose substantial information concerning their ownership interests. The reporting requirement commences with an effective date of the implementation of Treasury regulations, which must be published no later than Jan. 1, 2022. The objective of the CTA is to hinder criminals and terrorists from using shell companies to launder money and evade taxes. However, the legislative sweep of the CTA is so broad that it will sweep in many business owners and entities that have no such intent. Additionally, the CTA is intended to foster increased corporate transparency. There are substantial civil and criminal penalties imposed for the willful failure to comply with these reporting requirements or providing false or fraudulent information.
The new reporting burden falls on what the CTA terms “reporting companies,” which is any corporation, limited liability company, or similar entity registered to do business in the United States, with certain exceptions. The CTA exempts many categories of regulated entities, such as banks, securities broker-dealers, investment advisers, political organizations, tax-exempt organizations under IRC Section 501(c), insurance companies, and any taxable entity that has more than 20 full-time employees, reports more than $5 million in gross receipts to the IRS, and maintains an operating presence through a physical office within the United States. The latter condition will be of particular interest and concern to foreign business owners who operate through entities registered to do business inside the United States, but which do not have a physical office in the U.S., such as foreign businesses that operate through sales operations in the United States.
The information required is the name, date of birth, current address (business or residential), and unique identifying number from an acceptable document (such as a state driver’s license, passport, or a “FinCEN identifier”) for any beneficial owner of the company. A beneficial owner (with certain exceptions) is any natural person who, directly or indirectly, owns 25% or more of the equity interest in a reporting company, exercises “substantial control” over the reporting company, or receives substantial economic benefits from the assets of a reporting company. The CTA does not define the terms “substantial control” or “receives substantial economic benefits,” so the to-be-issued regulations will be important in interpreting how the act is to be applied.
Reporting companies created after the effective date must submit the required information upon formation. Reporting companies already in existence on the effective date will have two years from the effective date to file the required information. Reporting companies must also file additional information if there are changes to information pertaining to its beneficial owners (e.g., changes of name) and any changes to its ownership or control. FinCEN will maintain the information reported under the CTA for the life of the reporting company, plus five years. FinCEN is authorized to use the information in this database for a multitude of purposes, including tax purposes. However, this information is not public record. Nonetheless, it will be available to a variety of government agencies at the federal, state, and local levels, either through court order or if the agency is involved with national security, intelligence gathering, or law enforcement. Foreign law enforcement agencies also may gain access to this information through a request to an appropriate U.S. agency, but approval of the request is not automatic. Financial institutions are permitted access to the information in the database, but only with the consent of the reporting company.
Unless a domestic or foreign company doing business in the United States is absolutely certain they are exempted from the reach of the new CTA reporting requirements, it behooves them to conduct a thorough analysis of whether they are required to submit to the new reporting regime. If they are, they must collect the required information from their beneficial owners. In some cases, this may be difficult, because – particularly if the beneficial owner is foreign – they may be reluctant or refuse to provide the required information. It may be prudent for a reporting company conducting any sort of equity financing to be sure that any potential investor is aware of the company’s reporting requirements that involve revealing their personal information to the U.S. government. Additionally, if a client has “dormant entities” they either formed and didn’t get around to activating, or which formerly held active businesses that have since been shut down, but legal dissolution has not occurred, this may provide impetus to formally liquidate them.
Wesley Yang, CPA, is a shareholder at Leech Tishman Fuscaldo & Lampl LLC in Pittsburgh. He can be reached at wyang@leechtishman.com.
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