By: Phil J. Petrina
Are you a current small business owner, or in the process of forming a new corporation or LLC? If so, you need to be aware of a new federal reporting requirement, which could affect your small business beginning in January of 2022. In 2020, Congress passed the Anti-Money Laundering Act, which was part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The NDAA included the Corporate Transparency Act (“CTA”) which became effective on January 1, 2021. However, beginning on January 1, 2022, the CTA will begin being enforced, requiring many small business owners to ensure they are in compliance with its reporting requirements or face criminal and/or civil penalties. The remainder of this article will provide an overview of what the CTA is, who it applies to, and how small business owners can ensure they are in compliance with these new federal reporting guidelines.
What is the Corporate Transparency Act?
In an effort to crack down on anonymous shell companies, money laundering, terrorism financing, and other illegal financial activities through the use of corporate structuring, Congress passed the Corporate Transparency Act. This Act will require corporations, limited liability companies, and other similarly formed entities to disclose information about their beneficial owners to the Financial Crimes Enforcement Network of the Department of Treasury (“FinCEN”). The CTA creates a private federal database of beneficial ownership information within FinCEN which will not be available to the public except in very limited circumstances.
In fact, the CTA states that FinCEN will only be allowed to disclose the data to the public if requested by (1) a federal agency engaged in national security or law enforcement, (2) state or local law enforcement, (3) the federal government on behalf of a judge, prosecutor, or law enforcement of another country, (4) a financial institution with the consent of the reporting company, or (5) a U.S. federal function regulator. Such records will be kept by FinCEN for “not less than five years” after a company terminates or ceases to exist.
But, Who is a “Beneficial Owner,” and Who do the Reporting Requirements Apply to?
The CTA defines a beneficial owner as a “natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (1) exercises substantial control over such company, or (2) owns 25% or more of such company.” If your company has a beneficial owner, your company will be required to report to FinCEN the following identifying information about the beneficial owner:
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- their full legal name
- their date of birth
- their current residential or business address; and
- their unique identifier numbers such as a passport, driver’s license number, or social security number.
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However, the CTA expressly exempts many large companies, those already heavily regulated by the SEC or other federal regulators, and charitable, religious, and political organizations from the reporting requirements. Specifically, if your company employs more than 20 full-time employees, reports over $5 million in gross revenues on your most recent tax return, and has an operating presence with physical offices in the U.S., the CTA exempts your company from its reporting requirements. This specific exemption exists because, as mentioned previously, the CTA was passed in an effort to crack down on the illegal activities which tend to travel through small shell companies.
The CTA also provides a set of exemptions for individuals who need not report their identifying information to FinCEN. The individual exemptions are: (1) minors, (2) those who are a nominee, custodian, or agent acting on behalf of another, (3) employees, acting within that capacity, whose control over or economic benefit is solely from their employment status, (4) those whose interest(s) in the company is solely through a right of inheritance, and (5) creditors of a company, unless they substantially control, or own more than 25% of the company.
How Can I Ensure My Company is in compliance with the CTA?
If none of the above exemptions apply to your small business, you must be sure to make the above disclosures to FinCEN, or risk facing criminal and/or civil penalties. If your business is formed or registered after January 1, 2022, you must disclose the beneficial owner(s) of the company to FinCEN on the date of formation or registration. If your business pre-existed the passage of the CTA, you must disclose this information in a timely manner, and not later than two years after January 1, 2022. Additionally, your company must update the information provided to FinCEN within one year of any change in such information.
A company that fails to report such information, or willfully provides false information, carries a $500 per day fine and/or a criminal penalty of up to $10,000 and up to two years imprisonment. However, the penalty is even steeper for any government employee or third party who makes an unauthorized disclosure of the beneficial owners’ private information. An unauthorized disclosure by the government or any third party carries a $500 per day fine and/or a criminal penalty of up to $250,000 and up to five years imprisonment. If there was an unintentional mistake made in the reporting, the CTA provides for a 90-day “safe harbor” from any civil or criminal penalties to correct such mistakes.
There are many questions that still remain as to how FinCEN will enforce the CTA, how they define substantial control, how and where a business must file these reports, etc. In accordance with the passage of the CTA, the Secretary of Treasury is mandated to issue Treasury Regulations that shed more light on some of these more nuanced questions by January 1, 2022, when the CTA becomes enforced. All business owners who may be affected by this Act should pay close attention to the release of the Treasury Regulations for guidance on some of these outstanding questions. Overall, if you own a small business you should be sure to understand the Corporate Transparency Act as the deadline for compliance with its reporting requirements quickly approaches.
Phil Petrina, at the time of this post, is a rising 3L at Penn State Dickinson Law, a member of the Class of 2022. Phil is the President of the Student Bar Association, on the Moot Court Board, a member of the Business Law Society, and a Pennsylvania Commonwealth Scholar. He is interested in corporate and commercial litigation, business law, and healthcare law. Phil can be contacted at pjp5327@psu.edu.
Sources:
https://www.congress.gov/bill/116th-congress/house-bill/2513/text
https://www.natlawreview.com/article/what-you-need-to-know-about-corporate-transparency-act
https://www.reedsmith.com/en/perspectives/2021/02/an-overview-of-the-corporate-transparency-act
Photo Sources:
https://www.nytimes.com/2019/11/07/magazine/how-to-set-up-a-shell-company.html
