The Corporate Transparency Act of 2021 (the CTA) is a federal law that became effective on January 1, 2022. The CTA requires all “reporting companies” to file a report with the Financial Criminal Enforcement Network (FinCEN) of the U.S. Treasury that discloses information about:
the person (aka “applicant”) who created the company by filing its formation documents (articles or certificate of organization, articles of incorporation, or certificate of partnership) with a state agency such as a Secretary of State.
A FinCEN report is a report all reporting companies must file with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury (FinCEN) that discloses personal information about each of the company’s beneficial owners and the reporting company’s applicant if the company was formed after December 31, 2023. The applicant is the person who created the company by filing its formation document (articles or certificate of organization, articles of incorporation, or certificate of partnership) with a state agency such as a Secretary of State. FinCEN reports are required by the Corporate Transparency Act of 2021, a federal law that became effective January 1, 2022.
A reporting company is a company that must file a FinCEN report and amend the report if any information in the report changes. A reporting company is an entity such as a limited liability company (LLC), a professional LLC, a corporation, a professional corporation, a limited partnership (LP), a limited liability partnership (LLP), a limited liability limited partnership (LLLP) that is not an excluded entity. See the list of excluded entities. Reporting companies include entities formed outside the United States that do business in the U.S.
Any entity that is formed under the law of a foreign country and that is registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian Tribe.
A domestic reporting company is a non-exempt entity formed in the U.S. that is created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian Tribe.
Almost all entities are “reporting companies” that must file a FinCEN report. There are thirty types of entities that are not reporting companies and that are exempt from the Corporate Transparency Act of 2021. See the list of exempt entities.
Except as provided in subparagraph (B), identify each beneficial owner of the a reporting company and its applicant shall disclose the following information in the reporting company’s FinCEN report:
(i) full legal name;
(ii) date of birth;
(iii) current, as of the date on which the FinCEN report is delivered, residential or business street address;
(iv) a unique identifying number from an acceptable identification document; and
(v) a scanned copy of the identification document from which the unique identifying number of the beneficial owner or applicant is obtained, in connection with reporting that unique number.
In leu of including the above information in the report about a beneficial owner or applicant that information can be replaced by the beneficial owner’s or applicant’s FinCEN identifier obtained by the beneficial owner or applicant by submitting the above information to FinCEN to get the FinCEN identifier..
If an entity is an exempt entity that has or will have a direct or indirect ownership interest in a reporting company, the reporting company or the applicant shall, with respect to the exempt entity, only list the name of the exempt entity; and shall not be required to report the information with respect to the exempt entity otherwise required.
A beneficial owner means, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise exercises substantial control over the entity or owns or controls not less than 25 percent of the ownership interests of the entity. The following are not beneficial owners:
(i) a minor child, as defined in the State in which the entity is formed, if the information of the parent or guardian of the minor child is reported in the FinCEN report;
(ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
(iii) an individual acting solely as an employee of a corporation, limited liability company, or other similar entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person;
(iv) an individual whose only interest in a corporation, limited liability company, or other similar entity is through a right of inheritance; or
(v) a creditor of a corporation, limited liability company, or other similar entity, unless the creditor meets the requirements of the first sentence above.
An individual may reach the 25 percent threshold by jointly owning or controlling with one or more other persons an undivided ownership interest in a reporting company. This means that if a married couple owns 25% or more of an entity as community property or joint tenants they are both considered to be beneficial owners.
An individual may directly or indirectly own or control an ownership interest in a reporting company through a trust or similar arrangement. An individual may own or control ownership interests by way of the individual’s position as a grantor or settlor, a beneficiary, a trustee, or another individual with authority to dispose of trust assets. In relation to trust beneficiaries in particular, FinCEN believes that it is appropriate to consider an individual as owning or controlling ownership interests held in trust if the individual is the sole permissible recipient of both income and principal from the trust, or has the right to demand a distribution of, or withdraw substantially all of the assets from, the trust. Other individuals with authority to dispose of trust assets, such as trustees, will also be considered as controlling the ownership interests held in trust, as will grantors or settlors that have retained the right to revoke the trust, or to otherwise withdraw the assets of the trust.
There are three specific indicators of substantial control of a reporting company:
(1) Service as a senior officer of a reporting company;
(2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and
(3) direction, determination, or decision of, or substantial influence over, important matters of a reporting company.
The regulations includes a catch-all provision to make clear that substantial control can take additional forms not specifically listed. Each of these indicators supports the basic goal of requiring a reporting company to identify the individuals who stand behind the reporting company and direct its actions. The first indicator identifies the individuals with nominal or de jure authority, the second and third indicators identify the individuals with functional or de facto authority, and the catch-all provision recognizes that control exercised in novel and unorthodox ways can still be substantial. This last approach is consistent with the common law tradition and the standards that FinCEN examined, as well as the broader objective of preventing individuals from evading identification as beneficial owners by hiding behind formalisms such as job descriptions, job titles, and nominal lack of authority.
The holder of a debt instrument that provides that the reporting company is the debtor is a beneficial owner if the creditor’s rights enables the holder to exercise the same rights as one of the specified equity or other interests, including the ability to convert the instrument into one of the specified equity or other interests.
Only companies formed after 2023 must report information about their “applicant.”
An applicant is individual who forms a reporting company by filing an application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe; or registers or files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under the laws of a State or Indian Tribe. A reporting company formed or registered before the effective date of the regulations, and whose company applicant died before the reporting company had an obligation to obtain identifying information from a company applicant, may report that fact along with whatever identifying information the reporting company actually knows about the deceased company applicant.
A company applicant also includes any individual who directs or controls the filing of such a document by another person. This ensures that the reporting company provides information on individuals that are responsible for the decision to form a reporting company given that, in many cases, the company applicant may be an employee of a business formation service or law firm, or an associate, agent, or family member who is filing the document on behalf of another individual. In such a case, the individual directing or controlling the formation of a legal entity should not be able to remain anonymous simply by directing another individual to file the requisite paperwork, and must therefore disclose his or her identity to FinCEN along with the individual that actually made the filing.
If an individual is a beneficial owner of a reporting company because the individual owns at least 25 percent of the ownership interests of the reporting company, and the beneficial owner dies, a change with respect to the required information will be deemed to occur when the estate of a deceased beneficial owner is settled. The reporting company must disclose the death and change of beneficial owner. When the estate of a deceased beneficial owner is settled either through the operation of the intestacy laws of a jurisdiction within the United States or a testamentary deposition, the reporting company is required to file an updated report removing the deceased former beneficial owner and, to the extent appropriate, identifying any new beneficial owners.
A FinCEN identifier is a code issued by FinCEN to a person or an entity that can be used to identify the person or entity in a FinCEN report. When a FinCEN identifier is used in a FinCEN report that required information about the beneficial owner or applicant does not have to be included in the report.
Yes. If a trust owns 25 percent or more of a reporting company or if a trustee of a trust has substantial control over the reporting company then the trustees of the trust are beneficial owners whose information must be disclosed in a FinCEN report.
If a married couple owns 25 – 49.999 percent of a reporting company both of them are beneficial owners whose information must be disclosed on the reporting company’s FinCEN report. If a couple jointly owns 25 percent of a reporting company because together they would be considered to have substantial control over the reporting company and the reporting company would then be required to disclose their information in the company’s FinCEN report.