The Corporate Transparency Act (the "Act") is a significant piece of legislation enacted as part of the National Defense Authorization Act for Fiscal Year 2021. The Act was designed to prevent the misuse of corporations and other entities for illicit purposes such as money laundering, financing terrorism and tax fraud. It does this by increasing transparency in the ownership of these entities, as described further below.

Trusts and Estates

In practice, the Act will impact a substantial number of individuals and trusts. For example, family limited liability companies, family limited partnerships, investment entities, closely held businesses and limited liability companies formed to hold real estate are likely to be considered “reporting companies” under the Act. In turn, the individuals who own and control these entities — whether directly or indirectly through one or more trusts — will need to provide their personal identifying information to FinCEN or face substantial penalties for failure to do so. All individuals who are involved with such entities, whether directly or through trusts, should be aware of the existence of the Act and its obligations.

Reporting Companies and Beneficial Owners

The Act requires "reporting companies" to disclose their "beneficial owners" to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury. A "reporting company" is defined to include corporations, limited liability companies and other similar entities created under the laws of a state or Indian Tribe by the filing of a document with a secretary of state or similar state agency, or formed under the laws of a foreign country and registered to do business in the United States.

A "beneficial owner" is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, exercises substantial control over an entity or owns or controls not less than 25% of the ownership interests of the entity. The Act requires reporting companies to provide beneficial owners' full legal name, date of birth, current residential or business street address and an identification number from an acceptable identification document, such as a passport or driver's license.

Privacy and Confidentiality

FinCEN is required to maintain strict confidentiality of the reported information and can only disclose it under very limited circumstances. These circumstances include in response to a request from a federal agency engaged in national security, intelligence or law enforcement activity. The Act also allows FinCEN to disclose beneficial ownership information to financial institutions, with the reporting company's consent, to facilitate the compliance of the financial institution with customer due diligence requirements.

Exemptions

The Act provides several exemptions from reporting, including:

  1. Entities that (i) employ more than 20 full-time employees in the United States, (ii) filed in the previous year federal income tax returns demonstrating more than US$5 million in gross receipts or sales, and (iii) have an operating presence at a physical office within the United States.
  2. Certain financial services companies that are already required to disclose beneficial ownership information under other federal laws, such as banks, credit unions, investment advisers, broker-dealers, exchanges and insurance companies.
  3. Publicly traded companies, which are subject to their own set of disclosure requirements.
  4. Churches, charities and other non-profit organizations that are exempt from taxation under section 501(c) of the Internal Revenue Code.
  5. Any entity that has been in existence for over one year and is not engaged in active business or ownership of assets, including real estate.

Notably, trusts (other than certain statutory trusts) and estates are generally exempted from the definition of a reporting company, as they are generally not created by filing documentation with a state agency. This means that many traditional estate planning structures may not be subject to the Act's reporting requirements. However, this exemption does not apply if a trust owns a substantial interest in a reporting company, or if the trust exercises substantial control over a reporting company. In such cases, the reporting company would still need to identify its beneficial owners.

In the context of trusts, determining who the beneficial owner is can be complex. The Act does not specifically define how beneficial ownership applies to trusts. However, based on the general definition of a beneficial owner, it could potentially include the following individuals:

  • Trustees: Trustees often have substantial control over a trust, including the power to manage and distribute trust assets. Therefore, they may be considered beneficial owners.
  • Trust Protectors or Other Powerholders: If a trust has a protector or other individual with significant powers over the trust (such as the power to remove and replace trustees or direct investments), that individual may be considered a beneficial owner.
  • Certain Beneficiaries: Beneficiaries who have a certain ownership interest in the trust (for example, withdrawal rights) or who have the ability to control the trust's activities may be considered beneficial owners. This could potentially include beneficiaries who are entitled to a certain percentage of the trust's income or principal, or who have the right to direct the trust's activities through investment control or trustee removal and replacement functions.

Deadlines and Updating of Information

The Act requires reporting companies to submit beneficial ownership information within 90 days of their formation or registration for entities formed on or after January 1, 2024. Newly formed entities will also be required to submit information regarding “company applicants,” which includes up to two individuals who are substantially involved in the formation of the reporting company.

Existing entities (i.e., those that have been formed prior to January 1, 2024) that qualify as reporting companies have until December 31, 2024, to comply with the reporting requirements.

The Act also requires reporting companies to update their beneficial ownership information within 30 days of any change. This ensures that the information held by FinCEN remains current and accurate, further enhancing the effectiveness of the Act in preventing illicit activities. For these purposes, “changes” would include, for example, a change in address of a beneficial owner, or the addition or deletion of any beneficial owners.

Penalties for Non-Compliance

Non-compliance with the Act's reporting requirements can result in significant penalties. Civil penalties can reach up to US$500 per day that the violation continues, and criminal fines can be up to US$10,000. Additionally, a willful failure to report accurate beneficial ownership information or a willful provision of false or fraudulent beneficial ownership information can result in imprisonment for up to two years.

What’s Next?

FinCEN continues to promulgate additional guidance regarding beneficial owner reporting, including, most recently, a small entity compliance guide.1

FinCEN is also developing a form of beneficial owner report for reporting companies to report their company applicants and beneficial owners. Additionally, FinCEN has indicated that beneficial owners will be able to obtain unique FinCEN identifying numbers in lieu of providing sensitive identifying data to reporting companies. While further information is not yet available regarding either of these topics, individuals who own (directly or through trusts or other entities) interests in reporting companies should continue to monitor these topics to ensure compliance with the Act in 2024.

New Yorkers should be additionally aware that the New York legislature has proposed legislation that would implement similar reporting obligations in New York state. This particular piece of legislation, called the New York LLC Transparency Act, would require limited liability companies that are formed in (or authorized to do business in) the state of New York — with exemptions for exempt companies under the CTA — to report their beneficial owners with the New York State Department of State. Unlike the Act, the proposed New York legislation will be made public and available by searchable database (with the exception of personal identifying information). The New York LLC Transparency Act has passed both houses of the New York legislature and awaits signature from Governor Hochul.