Do you own a small business? Are you a member of an LLC or a shareholder in a closely held company? (A closely held company has a limited number of shareholders and is often a private company that does not trade publicly). If so, you should be aware of the Corporate Transparency Act (CTA). This law was passed by Congress on January 1, 2021, because, according to the legislative history, “malign actors seek to conceal their ownership of corporations, limited liability companies, or other similar entities in the United States to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States.”

The CTA requires the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Department of the Treasury, to establish and maintain a database of beneficial owners of entities in the United States. Final regulations were issued on September 30, 2022, and the law will take effect on January 1, 2024. The law provides 23 exemptions from the new reporting requirements, mostly for already heavily regulated companies such as banks, insurance companies, publicly traded companies and credit unions. Typical charitable organizations that qualify under 501(c) of the Internal Revenue Code are also exempt. Most other entities, whether foreign or domestic, will need to report certain information about the beneficial owners and applicants of the entity unless they have at least 20 full-time employees, filed a United States income tax return in the previous year demonstrating $5 million in gross receipts or sales, and has an operating presence with a physical office within the United States.

For those entities that are not exempt, they will need to file applicable reports that include information about the person who formed the entity (known as the “applicant”) and each “beneficial owner” of the entity. A beneficial owner is someone who exercises substantial control over the entity or owns or controls not less than 25 percent of the ownership interest of the entity. By statute, minors, nominees (e.g. custodians), employees acting on behalf of a company, future owners through inheritance, and creditors are exempt from being listed as beneficial owners. The reporting company must report the full legal name, date of birth, current residential or business street address, and a unique identifying number with a copy of the underlying document (e.g. driver’s license number and copy of the driver’s license) for each beneficial owner and applicant. Alternatively, individuals may submit the required information directly to FinCEN and be issued a unique FinCEN identifier that can be used by the reporting company to identify the person.

Reporting requirements start January 1, 2024. Please make an appointment with one of our experienced business attorneys for any questions you have about whether your closely held business entity must report under the CTA.

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