Who Benefits? The Corporate Transparency Act Requires Companies to Disclose Their Beneficial Owners Under New Federal Rules

February 3, 2023

To do business in Wisconsin, a business owner needs to file numerous documents with federal, state, and local governments. Congress recently added a new one. Under the Corporate Transparency Act, most corporations, LLCs, and similar company types doing business in the United States must file a report divulging the personal information of anyone who “controls” that company. Starting January 2024, companies will file the report with FinCEN (the Financial Crime Enforcement Network, an agency in the Treasury). While the report will likely be simple to file, determining who needs to be included in the report gets tricky.

People can hide their identities fairly easily in America by setting up a company; often, this is legitimate. For example, many people set up LLCs to hold real estate. The deed will name the LLC rather than the person. It requires some detective work to figure out who is behind that LLC. Unfortunately, some people use the anonymity of a company for illegitimate purposes, such as money laundering or financing terrorism. In response, Congress passed the Corporate Transparency Act. The Act attempts to assist federal law enforcement agencies in deterring the use of corporate anonymity to commit such crimes. The Act requires almost all corporations and LLCs to file reports detailing who is in control behind the company name.

In September 2022, FinCEN issued final rules on how the Act will be implemented. A company must evaluate these rules to determine if and how it needs to file.

The first step for any company should be determining whether it is exempt from filing. Most corporations and LLCs will be subject to the filing requirement. However, FinCEN’s rules list 23 exemptions. For example, banks, insurance companies, and investment companies are exempt, likely because these businesses already divulge voluminous amounts of information as part of a highly regulated industry. Tax-exempt entities also happen to be exempt from the filing requirement. Sole proprietorships and general partnerships also, presumably, do not count as a company and so do not need to file.

There is one more wide-reaching exemption—a “large operating company.” To qualify, a corporation or LLC must have at least 21 full-time employees, have an “operating presence” at a physical location in the United States, and must have reported at least $5 million in gross receipts on the previous year’s tax return. A company that meets all three of these requirements is exempt from filing. Be careful, though, as the moment any of these no longer apply, the company loses the exemption and a 30-day clock starts ticking until it must file.

If no exemption applies, the second step for a company filing under these rules is determining whose information to include. If a person qualifies as a “beneficial owner” under the rules, the company must disclose that person’s name, address, date of birth, a number on an identifying document (such as a passport or driver’s license), and an image of that identifying document. Again, the information is not hard to collect for each beneficial owner. But who counts as a beneficial owner under the rules?

In essence, the rules require disclosing those who own 25% or more of the company, or who exercise “substantial control” over the company. Because of the myriad ways someone can directly or indirectly exercise “substantial control” of a company, though, the rules go into painful detail about who could qualify. If you are a senior officer of the company, you could qualify. If you are a board member, you could qualify. If you own 100% of a shell company that, in turn, owns 50% of the company that files, you could qualify. Even if you just happen to have an “arrangement” or “understanding” that you direct the company, without having any actual ownership stake or position with the company…you could qualify. When in doubt, over disclose. There are severe penalties for under disclosing beneficial ownership, but no penalties for over disclosing.

The examples above are just some of the many potential ways a person could exercise substantial control of a company. FinCEN estimated that for simple ownership structures, it will only cost about $85 to file the report, but for filings of more complex ownership structures it could cost as much as $2,600 to ensure compliance. In addition, companies need to re-file if any information in the report changes (like if an owner has a new address), potentially costing more time and money to ensure compliance.

Luckily, companies have plenty of time to figure out who needs to be included in these reports. Existing companies have until January 1, 2025 to file their first report, and probably cannot file a report until January 1, 2024 anyway. Companies that form after January 1, 2024 have 30 days after forming to file the report. You now have a whole year to get ready.

©The Business Leader – January 2023.  Reprinted with permission.

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