An Overview of the Corporate Transparency Act

The Corporate Transparency Act (“CTA”) was enacted on January 1, 2021, as part of the National Defense Authorization Act (“NDAA”). It effectively creates a national beneficial ownership registry. The CTA requires certain business entities to report beneficial owners and “applicants” to Treasury’s Financial Crimes Enforcement Network (“FinCEN”). CTA is intended to strengthen anti-money laundering laws and countering terrorism financing. Section 6403(a)(b) of the CTA requires newly formed U.S. corporations, limited liability companies, and certain other entities classified as a “reporting company” to report their beneficial ownership to Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“FinCEN”) at the time of formation or registration. Pre-existing reporting companies (those formed before the effective date of the CTA regulations), will also need to file reports under the CTA. This article provides an overview of the various entities that have an obligation to file under the CTA rules.

The Reporting Obligations of a Reporting Company

A reporting company has an obligation to file an initial Beneficial Ownership Information (“BOI”) report with FinCEN. The timing of the initial filing depends on when the company was created:

1. Before January 1, 2024- the initial filing must be made by January 1, 2025.

2. January 1, 2024 – December 31, 2024- the initial filing is due within 90 days of the company’s creation or registration.

3. On or after January 1, 2025- the initial filing is within 30 days of the company’s creation.

CTA Section 6503(a)(11) defines a “reporting company” as a corporation, limited liability company, or “other similar entity” that is created by the filing of a document with a secretary of state or similar office under the law of a U.S. State (including any U.S. commonwealth, territory or possession of the U.S.) or Indian Tribe or formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with such office. A reporting company does not include the following:

1. An issuer of securities under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or that is required to file supplementary and periodic information under Section 15(d) of the Exchange Act;

2. An entity established under the laws of the United States, a state, or political subdivision of a state, or under an interstate compact between two or more states and that exercises governmental authority on behalf of the United States or any such state or political subdivision;

3. A bank;

4. A Federal or state credit union;

5. A registered money transmitting business;

6. A broker or dealer registered under Section 15 of the Exchange Act;

7. An exchange or clearing agency registered under Section 6 or Section 17A of the Exchange Act;

8. Any other entity registered with the Securities and Exchange Commission (the “SEC”) under the Exchange Act;

9. An investment company or investment adviser registered with the SEC;

10. An insurance adviser that has made certain required filings with the SEC;

11. An insurance company as defined in the Investment Company Act of 1940;

12. An insurance producer that is authorized by a state and subject to supervision by the insurance commissioner or a similar official or agency of a state and has an operating presence at a physical office within the United States;

13. Certain entities registered with the Commodity Futures Trading Commission under the Commodity Exchange Act;

14. A public accounting firm registered under the Sarbanes-Oxley Act of 2002;

15. A public utility that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States;

16. A financial utility designated by the Financial Stability Oversight Council;

17. A pooled investment vehicle that is operated or advised by certain entities described in other clauses above;

18. A tax-exempt Section 501(c) corporation, political organization, charitable trust or split-interest trust exempt from tax;

19. Certain corporations, limited liability companies or other similar entities that operate exclusively to provide financial assistance to, or hold governance rights over, tax-exempt Section 501(c) corporations, political organizations, charitable trusts or split-interest trusts exempt from taxation;

20. An entity that: (i) employs more than 20 employees on a full-time basis in the United States; (ii) filed in the previous year federal income tax returns in the United States demonstrating $5,000,000 in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States;

21. A corporation, limited liability company or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by one or more aforementioned exempt entities (“exempt subsidiaries”);

22. A corporation, limited liability company or other similar entity: (i) in existence for over one year; (ii) that has not engaged in active business; (iii) that is not owned, directly or indirectly, by a foreign person; (iv) that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000; and (v) that does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company or other similar entity (an “exempt grandfathered entity”); and

23. Any entity or class of entities that the Secretary of the Treasury has determined by regulation, with the written concurrence of the Attorney General of the United States and the Secretary of Homeland Security, should be exempt because requiring beneficial ownership information would not serve the public interest and would not be highly useful in national security, intelligence and law enforcement efforts to detect, prevent or prosecute money laundering, the financing or terrorism, proliferation finance, serious tax fraud or other crimes. 

The Definition of a Beneficial Owner as Per the CTA

For CTA purposes, a beneficial owner of an entity is defined in Section 6403(a)(a)(3) as any individual who, directly or indirectly (including through contract, arrangement, understanding, relationship, or otherwise) exercises “substantial control” over the entity or owns or controls not less than 25 percent of the ownership interests in the entity. The term “substantial control” is not defined in the CTA. The CTA requires reporting companies to disclose beneficial ownership information to FinCEN.

Every Reporting Company will need to prove FinCEN the following information for each beneficial owner and applicant: their full legal name, date of birth, current address (home or work), and a unique identification number. The identification number is any of the following: non-expired U.S. passport, non-expired U.S. or state government identification, non-expired driver’s license from a state or a foreign passport. The beneficial owner definition excludes the following:

1. Minors (provided the parent or guardians information is reported);

2. Nominees, intermediaries, custodians, agents;

3. An individual who is an employee of a Reporting Company and whose control or economic benefits over the Reporting Company is solely from his or her employment;

4. An individual whose only interest in a Reporting Company is through a right of inheritance; and

5. A creditor of a Reporting Company (unless the creditor is a beneficial owner in his or her own right).

Penalties for Failing to Comply with the CTA Rules and Regulations

Any person who willfully provides, or attempts to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identification photograph or document, or fails to file complete and accurate reports or fails to provide updated reports will face penalties of up to $10,000 (accruing at $500 per day that the report is outstanding) and/or imprisonment for up to two years. See 31 U.S.C. Section 5336(h)(3).

Questions that Remain Unanswered for the Pending Regulations

The pending CTA regulations have left some important questions unanswered as to the definition of a reporting company. The CTA regulations define a reporting company as a corporation, limited liability company, or any “other similar entity that is created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe.” Under this definition, it is possible that limited partnerships will be classified as a reporting company. This is because general partnerships are typically not created by filing a document with the secretary of state. The pending regulations also do not appear to classify a foreign entity that is only holding U.S. real estate as a reporting company. Section 6043(a)(11)(ii) of the CTA defines a reporting company as an entity “formed under the law of a foreign country that registers to do business or applies for a certificate of authority to transact business in a state or for a similar business license from an Indian Tribe.” FinCEN’s request for comments used slightly different language: “registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian Tribe.” But what if a foreign entity simply fails to register or apply for a certificate of authority when required? The CTA’s definition of a reporting company does not seem to cover that circumstance. See Corporate Transparency Act to Have Major Impact on Clients and Attorneys, The Florida Bar Journal/November/December 2021, Jonathan Warner.

Conclusion

Tax professionals should review the new CTA rules and watch for evolving CTA regulations. Tax professionals should also familiarize themselves with the new reporting requirements of the CTA.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony Diosdi focuses a part of his practice on criminal tax enforcement, broad-based civil tax compliance and white collar matters generally. He also advises clients on the IRS voluntary disclosure program, with particular focus on disclosure related to offshore banking accounts.

Anthony Diosdi is a frequent speaker at international tax seminars. Anthony Diosdi is admitted to the California and Florida bars.

Diosdi & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises throughout the United States. Anthony Diosdi may be reached at 415-318-3990 or contacted here.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.