On December 11, 2020, the U.S. Congress passed legislation requiring certain privately held companies in the U.S. to report ownership information to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The Corporate Transparency Act (CTA) was included in the National Defense Authorization Act for Fiscal Year 2021. The CTA shifts the burden of identifying and verifying beneficial ownership information for a number of privately held companies from financial institutions to the companies themselves. The legislation is intended to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving privately held companies in the U.S.

Who has to report?

The CTA defines a “reporting company” broadly but then exempts certain types of entities. All privately held corporations, limited liability companies and similar entities organized in any state, as well as foreign companies registered to do business in the United States, will be required to report their ownership information to FinCEN. Although not explicitly stated in the CTA, partnerships and trusts that are formed within the U.S. are likely to be considered “similar entities.” Public companies, i.e., companies that have issued a class of securities registered under Section 12 of the Securities Exchange Act of 1934 or that are required to file reports under Section 15(d) of that act, and their controlled subsidiaries are exempt from reporting. Other entities exempt from reporting include:

• Governmental entities and public utilities;
• Banks, bank holding companies, and credit unions;
• Broker dealers and registered investment advisors;
• Registered investment companies and certain pooled investment vehicles;
• Insurance companies;
• Registered public accounting firms;
• 501(c) non-profit entities;
• Most importantly, companies with more than 20 full-time employees in the Unites States, more than $5 million in gross receipts or sales, and an operating presence at a physical office in the United States; and
• Entities owned or controlled by one or more of such exempt entities.

Who is a beneficial owner?

A “beneficial owner” of an entity is defined by the CTA as an individual who directly or indirectly (i) exercises substantial control over the entity, or (ii) owns 25% or more of the equity interests of the entity. The term does not include a minor child; a person acting as a nominee, intermediary, custodian, or agent on behalf of another person; a person who controls an entity solely because of his or her employment; a person whose only interest in an entity is through a right of inheritance; or a creditor of an entity not otherwise controlling the entity. 

What information must be reported?

A reporting company will be required to identify each beneficial owner and report the individual’s full legal name, date of birth, current residential or business street address, and a unique identifying number from an “acceptable identification document” or a FinCEN identifying number. Acceptable identification documents include non-expired U.S. passports, state issued driver’s licenses, and state identification cards. If the beneficial owner does not hold any U.S.-issued identification documents, a non-expired foreign passport number is sufficient. FinCEN is supposed to store all information received pursuant to the CTA in a private database not accessible to the public.

Deadlines and Penalties for Failing to Report

Reports will begin to be required once the implementing regulations are promulgated by the Secretary of the Treasury and an effective date is determined. The regulations must be promulgated no later than one year from January 1, 2021. Newly formed companies will be required to report beneficial ownership information at formation. Existing entities will be required to report this information within two years of the effective date, which is a requirement that could be overlooked by uninformed businesses. Thereafter, reporting companies must report changes in beneficial ownership within one year of the change. The CTA authorizes civil and criminal penalties for willfully providing false or fraudulent information or willfully failing to report complete or updated information.

Conclusion

The CTA represents a marked departure from historical requirements to report the ownership of privately held companies. One of the reasons Delaware has traditionally been the preeminent jurisdiction for business formation is Delaware’s limited business ownership reporting requirements. The CTA will now require all privately held companies, newly formed and existing, that do not meet an exemption to report this information to FinCEN. Although the burden is placed on these companies, expect that many will in turn delegate (or assume they have delegated) the responsibility to their accounting or law firm, which may be problematic if confusion over the responsibility results in noncompliance. Additionally, the CTA requires the secretary of state office in each state to warn new registrants of these new reporting rules, but because this is not something these agencies would normally expect to be assigned to them, it remains to be seen how successful their efforts will be.