The Financial Crimes Enforcement Network (FinCEN) has issued final regulations setting out the reporting requirements of the Corporate Transparency Act (CTA). The CTA requires the reporting of beneficial ownership information by certain domestic and foreign entities, called “reporting companies.” While trusts are not themselves reporting companies, if a trust holds an interest in a reporting company information about the trustee and the trust’s beneficial owners may need to be provided. Reporting may also be required with respect to limited liability companies, partnerships, and other entities used for business and estate planning purposes. Reporting companies formed on or after January 1, 2024, must report beneficial ownership 30 calendar days from the earlier of (i) the date the entity receives actual notice that its creation has become effective or (ii) the date the Secretary of State or similar office first provides public notice that the entity has been created. Reporting companies formed prior to January 1, 2024, must report beneficial ownership by January 1, 2025.
The CTA was enacted on January 1, 2021, for the purpose of preventing the illegal use of shell companies to launder funds. The CTA requires the reporting of beneficial ownership information by certain entities. FinCEN issued final regulations on these reporting requirements on September 29, 2022.
The CTA defines a reporting company as a corporation, LLC or similar entity that is created by filing a document with a state’s Secretary of State or is formed under a foreign country’s laws and is registered in the U.S. with a state’s Secretary of State. A trust is not considered a reporting company unless it is a type of trust required to file a document with the Secretary of State (such as a business trust).
There are also a number of exceptions to the definition of reporting company, including (i) tax-exempt organizations as defined in section 501(c) of the Internal Revenue Code and (ii) companies that employ more than 20 full time employees in the U.S. and have more than $5,000,000 in gross receipts and a physical operating presence in the U.S. Such entities are exempt from the filing requirements. If a reporting company is owned by an exempt entity, however, the reporting company may be required to report the name of the exempt entity.
A required report must be filed by an “applicant.” i.e., an individual who files a document to create or form a domestic corporation, LLC, or similar entity or who first registers a foreign entity to do business in the U.S.
A reporting company is required to provide information on its beneficial owners. A “beneficial owner” is the individual who directly or indirectly may exercise substantial control over an entity or who owns or controls at least 25% of an entity. Substantial control includes serving as a senior officer of the entity, such as CFO, CEO, COO, president, or general counsel; having authority to appoint or remove a senior officer or a majority of the board; or having the ability to affect important decisions of the entity. A trust that holds an interest in a reporting company may be a beneficial owner.
The final regulations provide that (i) a trustee who has the authority to dispose of trust assets, (ii) a beneficiary who is the sole permissible recipient of trust income and/or principal or who has the right to withdraw all or substantially all the trust’s assets, and (iii) a grantor or settlor who has the power to revoke the trust or withdraw the trust’s assets are each considered individuals having ownership or control of the entity. Trusts may have other beneficial owners as well. For example, a beneficiary who may remove and appoint a trustee may be deemed to be a beneficial owner.
A reporting company is required to report the following information for each beneficial owner: full legal name, date of birth, current residential address, identifying number from a passport or driver’s license, and the jurisdiction that issued the number. An image of the document and the individual must be submitted with the report.
A reporting company also is required to provide its full legal name and any “doing business as” name, street address, place of business, state of formation, and taxpayer or employer identification number. A foreign reporting company must include its U.S. state of registration.
Updated reports are required if there is any change to previously reported information and the updated report must be filed within 30 days of said change.
There are civil and criminal penalties for willful failure to comply with the reporting obligations. The penalties apply to a company, other entity, or any individual who willfully provides fraudulent or false information.