U.S. Treasury Clarifies Beneficial Ownership Reporting Requirements for Businesses

February 22, 2023

When it goes into effect on January 1, 2024, a provision tucked inside the Corporate Transparency Act (the “CTA”) will impose lengthy new reporting requirements on many business entities, including many single-member LLCs. The final rule recently issued by the U.S. Treasury Department’s Financial Crimes Enforcement Network clarifies the scope and applicability of these new reporting requirements. Businesses that fall under the CTA’s purview would be wise to begin the process of complying with these rules to avoid the various civil and criminal penalties associated with noncompliance.

The primary purpose of the CTA’s new reporting regime is to monitor foreign-owned shell companies, entities designed to shield illicit funds behind the formal mask of a corporate structure. Indeed, the U.S. Treasury Department’s final rule specifically points to recent attempts by Russian elites to evade Western sanctions by establishing nested networks of U.S. shell companies.

Nevertheless, the CTA will also apply to certain domestic companies that fit the definition of “reporting company” and fail to fall into one of the final rule’s exceptions. Among other things, the final rule (1) clearly defines which business entities must file reports, (2) sets forth an updated list of information that must show up on that report, and (3) clarifies which kinds of individuals must appear on the report. This article summarizes these three points in an effort to help business owners understand their CTA reporting obligations.

Which businesses must report under the CTA?

Under the CTA, there is a presumption that all domestic and foreign companies registered to do business in the U.S. are bound by the new reporting requirement. However, the final rule carves out and exempts 23 types of entities. Exempted entities include certain financial institutions, investment companies and advisors, certain public accounting firms, certain tax-exempt entities, and certain “large operating companies” that operate inside the U.S.

The exemption, for “large operating companies,” applies to companies that employ more than twenty full-time employees in the U.S. and demonstrate at least $5 million in sales from operations in the U.S. on the previous year’s federal income tax return.

What information must show up on the business’s report?

Those companies that are not exempt must disclose certain information relating to (i) the company itself; (ii) each “beneficial owner;” and (iii) each “company applicant.” Companies must disclose their full legal name, other names by which they do business, their address, their jurisdiction of registration, and their TIN. For each beneficial owner and company applicant, the company must disclose a host of information and documents, including a unique identifying number from an official document like a valid U.S. passport or driver’s license.

Who counts as a “beneficial owner” or a “company applicant”?

A beneficial owner of a company is any individual, subject to certain exceptions that are not discussed here, who exercises “substantial control” over the company or owns/controls at least 25% of the company’s ownership interests. As such, a reporting company can have multiple beneficial owners, each of which must be properly identified and reported under the CTA. While assets held in a trust are typically considered to be owned/controlled by the trustee for purposes of the CTA reporting regime, certain kinds of beneficiaries, grantors, and settlors may also be considered beneficial owners.

The final rule defines “substantial control”—the more opaque of the two criteria—to include individuals who serve in senior management, are entrusted with authority to remove senior officers, or exercise substantial influence over important decisions having to do with things like debt and major expenditures. The final rule’s definition of substantial control is explicitly non-exhaustive. Therefore, companies should take an expansive view of the term and set forth a list of beneficial owners that includes a wide range of individuals who exercise management authority.

A company applicant is an individual who files documents to form an entity. For companies in existence prior to January 1, 2024, the company only needs to report any of the company applicant’s required information that the company happens to have in its possession. For companies formed after that date, the full range of required information must be collected and disclosed.

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Companies that need to file a report should keep the following deadlines in mind: On the effective date of January 1, 2024, companies already in existence have one year to file their initial reports. Companies formed after January 1, 2024 must file their reports within 30 days of formation. All companies need to regularly file amendments to their reports within 30 days of any change to the information reported.

Failure to comply with these deadlines could result in civil penalties totaling $500 per day of noncompliance. Willful failure to file could result in a prison sentence of up to two years. Businesses should take time now to avoid these kinds of penalties.

Disclaimer

The content in the following blog posts is based upon the state of the law at the time of its original publication. As legal developments change quickly, the content in these blog posts may not remain accurate as laws change over time. None of the information contained in these publications is intended as legal advice or opinion relative to specific matters, facts, situations, or issues. You should not act upon the information in these blog posts without discussing your specific situation with legal counsel.