Beginning next year, small business owners will have new federal reporting requirements to comply with. The Corporate Transparency Act will require disclosure of substantial ownership and control interests by individuals in their corporation, LLC, or similar state-registered entity. The window for ublic comment on reporting regulations to be promulgated by the Treasury Department recently closed. The timeline for businesses to get into compliance will soon begin.
The Corporate Transparency Act
Effective January 1, 2021, an individual’s ownership in a company registered in the United States has become a federal affair. The Corporate Transparency Act, Title 64, Pub. L. No. 116-283 (2021) (“CTA”), was enacted as part of the larger National Defense Authorization Act of 2021, pursuant to the Anti-Money Laundering Act of 2020.
The stated purpose of the CTA is to aggressively combat money laundering, piracy, securities fraud, terrorism, and the financing of other organized crimes by removing significant layers of anonymity in business ownership for domestic and foreign entities operating within the United States. In enacting new federal reporting requirements for small businesses, Congress seeks to unravel the inadvertent cloak that differing state registration requirements have thus far unintentionally cloaked tax evasion, human trafficking activity, and other criminal conduct.
Enforcement & Scope
Under the CTA, a “corporation, LLC, or similar entity” formed or registered to do business with any State or Indian Tribe within the United States will now be required to identify all applicants and “beneficial owners” of the business. A “beneficial owner” is defined as “an individual” who “exercises substantial control over the entity,” or one who owns or controls at least “25% of the ownership interests of the entity.” An “applicant” means the individual who filed an application with the secretary of the state (or similar office) to form a U.S. entity or to register a non-U.S. entity under the laws of a State or Indian Tribe.
A beneficial owner or applicant must be identified by the individual’s:
- Full legal name;
- Date of birth;
- Current residential or business address; and
- “[U]nique identifying number from” a nonexpired: (a) U.S. passport; (b) State, local government, or Indian tribe identification document; (c) state driver’s license; or (d) foreign passport.
The Financial Crimes Enforcement Network (FinCEN) division of the Treasury Department is charged with enforcement of the Corporate Transparency Act, and has been charged by Congress to promulgate regulations and procedures for its enforcement by January 1, 2022. When these regulations are effective, an entity will be required to report this information at the time of formation or registration. Entities already in existence will have two years from promulgation to get into compliance. Updates to beneficial ownership interest will also trigger a reporting requirement.
The information collected by FinCEN will be maintained in a secure and encrypted system by the Secretary of the Treasury. It will be available to federal and state law enforcement, foreign law enforcement, the Treasury Department for tax administrative purposes, and, with consent of the reporting entity, financial institutions. Importantly, the information collected under the Corporate Transparency Act is not open to the public nor subject to FOIA requests.
Notably, a comment submitted by the National Association of Attorneys General (“NAAG”), which Virginia Attorney General Mark Herring endorsed, petitioned FinCEN to expand state law enforcement use of CTA information to be available for use at trial or during discovery in a relevant civil or criminal investigation.
NAAG highlighted that CTA information is “rarely ‘highly useful’” to law enforcement if it cannot be used for exculpatory or impeachment purposes, and encouraged FinCEN to consider regulations that allow disclosure to defendants in criminal or civil proceedings, perhaps through use of a protective order.
Failure to abide by Corporate Transparency Act reporting requirements could result in civil penalties of $500/day up to $10,000, or 2 years’ imprisonment. Unlawful disclosure or use of information gathered pursuant to the CTA can result in penalties of $500/day up to $250,000, or 5 years’ imprisonment.
Forthcoming Treasury regulations may provide further clarification on limitations of the Corporate Transparency Act. Entities already required to make federal disclosures are exempt from its reporting requirements. The exemptions also include financial institutions, publicly traded companies, insurance companies, tax-exempt organizations, and certain registered investment companies.
Further, as any entity that employs more than 20 people, maintains a physical presence in the U.S., and generates $5 million or more in annual revenue is not covered by the Act.
Application to You
In any event, 2022 will bring new and potentially onerous reporting requirements for small businesses. If you have an ownership interest in a corporation, LLC, or like entity formed or registered in Virginia, please reach out to one of the attorneys at Hanger Law so we can help you navigate your business’s state and now federal registration requirements. We will continue to track the progress of Corporate Transparency Act as regulations unfold, and will keep you informed as information becomes available.
Hanger Law remains a leading force for you in the management of your business. We look forward to assisting you with all of your small business needs.
Disclosure: This piece is not a comprehensive discussion of the topic addressed and cannot be relied upon as legal advice.