Take-Away: The Corporate Transparency Act (CTA)and it’s reporting requirements is only four months away. Now is the time to become familiar with the CTA’s reporting requirements.

Background: As was covered a few months back, the Corporate Transparency Act (CTA) is about to ‘go live’ in the next four months. As an overview, the CTA broadens the reporting to U.S. authorities of information, including personal information, that concerns the beneficial ownership of nearly all small U.S. companies. What follows is a summary (yet again!) of the CTA’s key provisions and its reporting requirements as trustees begin to prepare to comply with the CTA’s mandates.

Final Regulations: The final Regulations to implement the CTA were issued on September 29, 2022.

Filing Dates: For newly created entities, the information must be reported on January 1, 2024. For entities that were created prior to January 1, 2024, the reported information must be provided to Treasury’s Financial Crimes Enforcement Network (FinCEN) by January 1, 2025 for the initial filing.

Effective Date Extended?: While the above dates are imbedded in the CTA, there have been a handful of lawsuits filed that could possibly cause these CTA effective dates to be extended. However, FinCEN has not yet indicated that it will extend the CTA’s effective dates.

Entities Covered: Unless an entity is specifically exempted, beneficial ownership information will be required to be reported to FinCEN by any domestic entity that was “created by the filing a document with a secretary of state or any similar office under the law of a State or Indian tribe.” This includes corporations, partnerships, business trusts, and limited liability companies (LLCs.) As a result, most small business entities will be covered under the CTA. [31 Code of Federal Regulations 1010.380(c.)]

Exempt Entities: The CTA exempts 23 types of entities from reporting. Examples include: banks, regulated financial institutions, insurance companies, CPA firms, pooled investment vehicles, tax-exempt entities, business entities with more than 20 employees, and business entities with annual gross receipts of greater than $5.0 million.

Reporting Requirements: The following information must be reported with regard to all individuals and entities identified as company applicants or beneficial owners: Name; birth date; address; and a unique identifying number and the issuing jurisdiction from an acceptable identification document, e.g., passport; driver’s license, along with an image of that document.

Company Applicant: A company applicant that must report includes the individual who directly files the document that creates the reporting entity and the individual who is primarily responsible for directing or controlling that filing. An applicant would  include lawyers, paralegals and other service providers who are in charge of the actual filing of the document with the state.

Beneficial Ownership: The CTA broadly defines this concept to include any and all of the individuals who directly or indirectly either (i) exercise substantial control over a reporting company; or who  (ii) own or control at least 25% of the ownership interests of a reporting company, including puts, calls, straddles or other options or privileges of buying or selling.

Substantial Control: Substantial control individuals who are required to be reported under the CTA include: (i) senior officers, like president, CF0, general counsel, CEO, or any other officer, regardless of title, who performs a similar function; and (ii) any person who “directs, determines or has substantial influence over important decisions made by the reporting company or has any other form of substantial control over the reporting company.” Substantial influence is not defined in the Regulations, so it is anyone’s guess who has practical substantial influence over the reporting company.

Trusts: A trust, standing alone, is not a reporting company. However, if the trust holds an interest in a reporting company, e.g. an LLC that owns real estate for liability protection purposes, the beneficial interest in that reporting company held in the name of the trust will have to be reported. This would also include LLC ‘wrappers’ that are used to create valuation discounts to avoid federal gift taxes.

FinCEN will look through a revocable trust,  a single beneficiary trust,  and a discretionary trust in order to identify beneficial interests of the entity held by the trust.

If the trust holds an interest in a reporting company, the individuals who will be required to be reported as beneficial owners will generally include: Trustees; others who possess authority to dispose of trust assets, e.g. a trust director; any beneficiary who is the sole permissible recipient of income or principal from the trust, or who possesses the right to demand a distribution of, or withdraw substantially all of the trust assets, and any settlor who possesses the right to revoke the trust or otherwise withdraw the assets of the trust.

Penalties: Civil penalties are $500 a day up to a maximum of $10,000.  Criminal penalties can also be charged with up to two years imprisonment. However, it appears that in order to trigger such penalties there must be the willful failure to file, or the provision of false or fraudulent information, or the willful failure to provide complete or updated beneficial information to FinCEN.

Conclusion: Now would be a good time to start to compile the beneficial owner information that will soon be required to be furnished to FinCen with respect to a trust that holds an interest in a reporting company.