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A Brief Summary of the Corporate Transparency Act

The Corporate Transparency Act (CTA) was enacted as a part of the National Defense Authorization Act by Congress on January 1, 2021. When it becomes effective, it will mainly apply to small U.S. businesses, requiring certain companies to file a report providing the name, date of birth, current address, and unique identification number (from a passport or driver’s license, for example) of the company’s “beneficial owner(s).” The report will be filed to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Treasury Department. This information must be updated every year to reflect any changes.

Effective Date

The CTA will become effective when the regulations published by the FinCEN go into effect, and that date can be no later than January 1, 2022 (one year after enactment of the CTA). On April 5, 2021, FinCEN published a proposed set of regulations to gather public comments. Since there have been no additional updates from FinCEN regarding the official publication, it is very likely that the regulations will become effective on January 1, 2022, making the CTA effective on the same date.

Timing for Compliance

The CTA will be applicable to companies depending on when the company was formed:

  • For entities existing before the date that FinCEN has published final regulations on the CTA, the reporting must be done in a timely manner, and not later than two years after the effective date of the regulations; and 

  • For entities formed or registered after the FinCEN regulations are effective, the reports must be filed at the time of formation or registration.

Additionally, a reporting company must update the information provided to FinCEN upon a change in beneficial ownership within one year of the change.

Reporting Requirements

For purposes of the CTA, the reporting requirements apply to any company that is a “Reporting Company”. The CTA defines this term as: “a corporation, limited liability company, or other similar entity” that is created by the filing of a document with the state or Indian Tribe, or formed as a foreign entity registered to do business in the United States. The definition explicitly excludes an extensive list of entities (a total of 24 listed). Among those excluded, the most prominent ones include:

  • Publicly traded companies (subject to SEC regulations);

  • Companies employing more than 20 full-time employees in the United States, operating from a physical office in the United States, AND having filed a tax return demonstrating more than $5 million in gross receipts/sales; and

  • Dormant companies which have been in existence for more than one year, are not engaged in “active business,” AND not owned (either directly or indirectly) by a non-U.S. individual.

  • Additional exceptions exist for certain financial institutions, charitable trusts, and pooled investment vehicles.

Beneficial Ownership

Under the CTA, a “beneficial owner” is an individual who, directly or indirectly (1) exercises substantial control over an entity; or (2) owns or controls at least 25 percent of the ownership interests in an entity.

There are five exceptions from the term “beneficial owner”:

  1. A minor child, if the child’s parent’s or guardian’s information is otherwise is reported properly;

  2. An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;

  3. An individual acting as an employee whose control is derived solely because of employment status;

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

  5. A creditor of the entity, unless the creditor meets the requirements of a beneficial owner.

Summary

As the one-year anniversary of the CTA enactment comes closer, it would be important for small business owners or entrepreneurs who are planning on starting new business entities to pay close attention to FinCEN’s publication for the CTA regulations.

© 2022 Varnum LLPNational Law Review, Volume XI, Number 334
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About this Author

Matthew Bower, Corporate formation attorney, Varnum
Partner

Matt is a partner on the Business and Corporate Services Practice Team, and participates in both the Startup and Emerging Companies and Intellectual Property Practice Teams. His practice focuses on corporate formation and organization, venture financings, joint ventures, mergers and acquisitions, corporate governance, securities law, and intellectual property protection and transactions. He works closely with startups, second stage and private companies on day-to-day issues and all manner of corporate and intellectual property transactions.

Matt's particular...

248/567-7404
Yezi 'Amy' Yan Corporate Attorney Varnum Law Grand Rapids
Associate

Amy is a member of Varnum’s Business and Corporate Practice Team.  She focuses on mergers and acquisitions, contract review and corporate governance matters. A skilled researcher with experience in corporate matters, entity formation and soft IP, she previously served as a research assistant at Wayne State Law School and as an associate at an econometric research firm.

Amy is fluent in Mandarin Chinese, her native language, and has moderate proficiency in Japanese.

616-336-6938
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