The New Beneficial Ownership Reporting Rule:
A Step towards Greater Transparency in US Businesses
Privately-owned companies in the United States have long enjoyed a great degree of privacy about their internal affairs, particularly as to the identities of their owners. In less than a year, that will begin to change.
On January 1, 2021, Congress enacted the Corporate Transparency Act (the “CTA”) as part of the Anti-Money Laundering Act of 2020. This Act mandates certain beneficial ownership reporting requirements, codified in 31 USC Section 5536.
This article provides a comprehensive exploration of the CTA’s new beneficial ownership reporting requirements, outlining who needs to report, what exceptions apply, and crucial timelines for compliance. By understanding these changes, business owners and legal professionals can better navigate this shifting landscape.
Table of Contents
- What is the Beneficial Ownership Reporting Rule & why was it implemented?
- Who is obligated to report under the CTA’s Ownership Reporting Rule?
- What are the exceptions to the CTA’s reporting requirements?
- Who is considered a “Beneficial Owner” of a Reporting Company?
- What is required to be reported by a Reporting Company?
- What are the reporting timelines & deadlines for companies?
- Final Thoughts & Key Takeaways
- Sources & More Information
What is the Beneficial Ownership Reporting Rule & Why was it Implemented?
The CTA’s beneficial ownership reporting requirements require certain corporations, limited liability companies, and other similar entities created or registered in the U.S., termed “Reporting Companies,” to report their beneficial owners to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The CTA empowers FinCEN to collect this information to establish and maintain a national registry of beneficial owners of entities that are deemed “reporting companies”. The information collected can be disclosed to authorized government authorities and financial institutions, subject to effective safeguards and controls.
This critical piece of legislation is premised by (i) the growing number of bad actors seeking to conceal their ownership of business entities through the use of shell companies in order to facilitate illicit activities, such as money laundering, terrorism financing, human and drug trafficking, and securities fraud; and (ii) the lack of state laws requiring companies to identify their beneficial owners, which arguably have allowed such exploitations by these bad actors.
The CTA and its beneficial ownership reporting requirements applicable to “Reporting Companies” will take effect on January 1, 2024.
Who is Obligated to Report Under the CTA’s Ownership Reporting Rule?
The CTA’s beneficial ownership reporting requirements apply to a range of entities that meet the CTA’s definition of a Reporting Company, and can be categorized as follows:
- Domestic reporting companies:
- Limited Liability Companies
- Any other entity created by filing a document with a secretary of state or similar office under state or Indian tribe law.
- Foreign reporting companies:
- Limited Liability Companies
- Other entities formed under foreign law and registered to do business in any U.S. state or Tribal jurisdiction by filing a document with a secretary of state or similar office.
Understanding these new reporting requirements and adapting your operations accordingly can be challenging. Contact us for a consultation to ensure your business remains compliant.
What are the Exceptions to the CTA’s Reporting Requirements?
As the CTA’s focus is on shell companies and other entities with limited or no operations, the CTA provides numerous exceptions, from having to meet the CTA’s reporting requirements
- Entities in a regulated industry (where existing regulatory regimens would already include beneficial ownership reporting)
- Publicly traded companies
- Investment vehicles operated by investment advisors
- Government entities
Notably, there is also an exception from required reporting for an entity that (i) employs more than twenty employees; (ii) has filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States. Additionally, entities that are subsidiaries of such excluded companies are also exempted from these reporting requirements.
Who is Considered a “Beneficial Owner” of a Reporting Company?
The CTA defines a beneficial owner of an entity as any individual who, directly or indirectly, (i) exercises substantial control over the entity or (ii) owns or controls not less than 25 percent equity in the entity. The phrase “substantial control” is not defined in the CTA, so further regulations will likely clarify its meaning.
The legislation expressly excludes certain individuals from the definition of beneficial ownership, including (i) a minor child (as long as the child’s parent’s or guardian’s information is reported); (ii) an individual acting as an intermediary or agent on behalf of another; (iii) a person whose control over a reporting company derives solely from their employment; (iv) an individual whose only interest in a reporting company is through a right of inheritance; or (v) a creditor of a reporting company (unless they qualify as a “beneficial owner” through substantial control or equity ownership).
What is Required to be Reported by a Reporting Company?
A Reporting Company must, in a report to FinCEN, provide each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver’s license or passport).
Should there be any change in the information previously reported, the Reporting Company is required to file an updated report within 30 calendar days after the date on which the change occurs.
Examples of changes that would necessitate an updated report include the following:
- Changes in who is a beneficial owner, e.g. due to transfers of ownership or sales of additional ownership interests.
- Reporting Company becoming exempt from the reporting requirements.
- Transfers of ownership interests due to an owner’s death.
- Transfers of ownership when a minor child reaches the age of majority.
- Any changes to an identifying document previously submitted, e.g. changes in name, address, or identifying number.
What are the Reporting Timelines & Deadlines for Companies?
- Companies created or registered before January 1, 2024, have until January 1, 2025, to file their initial reports.
- Companies formed or registered after January 1, 2024, must file their initial reports within 30 days of creation or registration.
- Companies must file updates to their beneficial ownership information within 30 days of any changes.
Final Thoughts & Key Takeaways
The CTA’s new beneficial ownership reporting requirements symbolize a major breakthrough in the fight against illicit finance and a step towards greater transparency in U.S. businesses.
However, the reporting requirements stand to significantly impact both domestic and foreign companies operating in the U.S., requiring them to adapt their operations to comply with the new rule. Founders Legal is here to help. Armed with in-depth knowledge and experience, our Business and Corporate Practice Group can help your business comply with the new rules.
Only time will tell the eventual effect of the CTA on the broader business landscape and its success in curtailing illicit financial activities. Nonetheless, understanding these key takeaways can help businesses and legal professionals better navigate the changing business regulations.
CTA Beneficial Ownership Key Takeaways:
- Greater Transparency: The CTA has introduced new beneficial ownership reporting requirements aimed at increasing transparency within U.S businesses.
- Targeted Entities: These requirements target certain corporations, limited liability companies, and other similar entities, known as “Reporting Companies.”
- Aim of the Act: The Act aims to combat illicit activities such as money laundering, terrorism financing, and other serious offenses that can be facilitated through shell companies.
- Who Must Report: The requirements apply to both domestic and foreign entities considered as Reporting Companies under the CTA.
- Exceptions: Several exceptions exist, including entities in regulated industries and publicly traded companies, among others.
- Definition of Beneficial Owner: The CTA defines a beneficial owner as an individual with substantial control over the entity or who owns or controls no less than 25 percent of its equity.
- Reporting Updates: Companies must file updates to their beneficial ownership information within 30 days of any changes.
- Timelines and Deadlines: Companies created or registered before January 1, 2024, have until January 1, 2025, to file initial reports. Companies formed or registered after this date must file their initial reports within 30 days of creation or registration.
Sources & More Information:
- FinCEN: Beneficial Ownership Information Reporting Home Page
- FinCEN: Beneficial Ownership Information Reporting Rule Fact Sheet
- FinCEN: FAQs Beneficial Ownership Information Reporting
- Federal Register: Beneficial Ownership Information Reporting Requirements
Still navigating the complexities of the CTA’s new beneficial ownership reporting requirements?
Founders Legal’s Business and Corporate Practice group is committed to helping businesses thrive in an ever-evolving legal environment. With a deep understanding of the Corporate Transparency Act and its implications, we are prepared to guide you through this complex new landscape. To ensure your business stays ahead and remains compliant, reach out to us for a consultation.