As part of their estate planning, individuals often utilize various legal entities, such as corporations, partnerships, limited liability companies, and trusts. In 2021, the federal Corporate Transparency Act (“CTA”) was enacted as part of a global effort to combat individuals’ use of entities to shield individual identities. Previously, the United States had resisted global pressure to adopt similar laws. The CTA is intended to increase transparency and combat the United States’ reputation as a tax haven by requiring many of those entities to report the individuals who are their “Beneficial Owners.”
The CTA becomes effective on January 1, 2024. Accordingly, companies and their owners need to be aware of the CTA and their upcoming compliance obligations.
It is very important to keep in mind that (1) the CTA and the related rules promulgated and enforced by the Financial Crimes Enforcement Network (“FinCEN”) are very broad and complex, and this summary does not address every detail of the CTA and (2) there are many unresolved issues under the CTA and FinCEN’s rules. In the coming months and years, we anticipate that many issues will be addressed in additional rulemaking, FAQs, and other interpretations but, unfortunately, there is not likely to be significant additional clarity before the CTA comes into effect.
Entities Required to Report
Subject to certain exceptions, some of which are discussed below, the CTA requires all U.S. entities created by the filing of a document with a state’s secretary of state or similar official (entities such as corporations, limited liability companies, limited partnerships, and certain state law business trusts) (“Reporting Companies”) to report Beneficial Ownership information to FinCEN. Non-U.S. legal entities that are qualified or licensed to do business in the U.S. also generally will be required to report.
Exceptions from Reporting Company status include, but are not limited to, SEC reporting companies, banks and credit unions, securities brokers and dealers, large operating businesses, and tax-exempt entities. Common law trusts are not considered to be Reporting Companies obligated to report under the CTA because they are not created by the filing of a document with a state’s secretary of state or similar official, but many entities owned by such trusts may be. Though some of these exemptions seem very broad, it is important to review the details very carefully before relying on those exemptions because they are, in fact, technical and nuanced.
Information Required to Be Reported
Each Reporting Company must report its name (including any trade names or DBAs), address, jurisdiction of organization, and federal taxpayer identification number (“TIN”). The Reporting Company’s TIN must be obtained from the IRS before filing the CTA report. In addition, each “Beneficial Owner” must report either (1) his or her full legal name, date of birth, and address and must supply a copy of a valid government-issued photo identification (e.g., a driver’s license or passport) or (2) his or her “FinCEN Identifier,” which is a unique identification number obtained from FinCEN that can be used by that individual for all CTA filings. Beneficial Owners are the human beings who exercise “substantial control” over the Reporting Company or who own or control at least 25% of the ownership interests of the Reporting Company, including by looking through trusts or other entities that directly own interests in the Reporting Company to the ultimate beneficiaries or owners. It is important to bear in mind that “Beneficial Owner” under the CTA is not defined the same as it is under many securities or tax laws.
While the CTA and the related FinCEN rules have left many unanswered questions, FinCEN recently released a “Small Entity Compliance Guide” that provides a few new answers. For example, a trustee of a trust that owns interests in a Reporting Company may be considered to exercise substantial control over the company and thus be classified as a “Beneficial Owner.” In addition, other individuals affiliated with a trust may be deemed to hold beneficial ownership interests that are subject to the foregoing 25% or more ownership or control “substantial control” test and therefore be considered “Beneficial Owners”, including (1) a beneficiary (a) who is the sole permissible recipient of trust income or principal or (b) who has the right to demand a distribution of or to withdraw substantially all of the trust’s assets and (2) a grantor or settlor of a trust who has the right to revoke or otherwise withdraw trust assets.
Reporting Companies formed on or after January 1, 2024, must file initial reports within 30 days of receipt of evidence of their formation from the applicable state authority. We note that FinCEN recently proposed to extend that initial report deadline to 90 days from formation, but only during 2024. This proposed change has not yet been adopted. Reporting Companies that were formed before January 1, 2024, must file initial reports before January 1, 2025, regardless of how long ago they were formed.
In addition, any time a Reporting Company experiences a change in Beneficial Ownership, it must update its CTA report within 30 days of that change. For example, an update is required when a Beneficial Owner dies or when someone who was exempt from reporting because he or she was a minor reaches the age of 18. Similarly, any errors in a CTA report must be corrected within 30 days after the error is discovered by the Reporting Company.
Penalties for Violating the CTA
Anyone who willfully provides false or fraudulent information or fails to report complete or updated information is subject to civil and criminal penalties, up to and including imprisonment. The penalties also may extend to persons in positions to make the report who did not do so.
The main regulatory framework of the CTA is relatively straightforward, but — as always — the devil is in the details, and there are lots of details.
To address the challenges of complying with the CTA, Gunster has formed a working group, which can be reached at [email protected].
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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