If You Own a Business, Prepare to Report

Part 1 of a series – 

Commencing January 1, 2024, the Corporate Transparency Act (“CTA”) requires millions of businesses to file beneficial ownership reports. The CTA was enacted as part of the Anti-Money Laundering Act of 2020 and is intended to prevent the use of legal entities to commit crimes ranging from tax fraud to money laundering.

Who do you report to? FinCEN.

Congress has charged the Financial Crimes Enforcement Network (“FinCEN”) with carrying out the implementation and enforcement of the CTA. On September 30, 2022, FinCEN published the primary rule detailing the “Reporting Companies” that are required to report beneficial ownership information. Further, FinCEN is to finalize and maintain a national registry to house all beneficial ownership information.

“Beneficial ownership information” – Who is a beneficial owner?

Per the Corporate Transparency Act (CTA):

“A beneficial owner is any individual who, directly or indirectly, has substantial control over a reporting company or owns at least a 25% interest in a reporting company.”

Reporting Companies – wide net and narrow exemptions

As one may presume, the CTA definition of a Reporting Company is broad and will cover millions of U.S. companies and certain non-U.S. companies. Reporting Companies include corporations, limited liability companies, limited partnerships, and other entities created by filing a document with a secretary of state or any similar office of a U.S. state or Indian Tribe.

With that said, there are 23 exemptions to the definition of a Reporting Company, such as U.S. public companies, banks, and securities brokers and dealers. Generally, the exempt entities are already required to report ownership information to another U.S. regulatory agency.

The first threshold inquiry is: does the entity fall under the sweeping definition of a Reporting Company? Generally speaking, is the entity any entity other than a general partnership, sole proprietorship, or trust? For millions of entities, this initial question will be answered yes.

The follow-up question is whether any of the 23 exemptions apply. It is important to bear in mind that nearly all the exemptions have specific requirements that the entity must meet to qualify for the exemption.

For example, the pooled investment vehicle exemption requires (1) the entity to be an investment company defined by the Investment Company Act of 1940 or would be an investment company but for certain commonly utilized exclusions provided for in that Act; and (2) the entity must be operated or advised by a certain type of exempt entity.

Most business owners will need to report. Seek advice.

According to a 2020 report by the U.S. Small Business Administration, there are 31.7 million U.S. small businesses, accounting for 99.9% of all American businesses. Of those, 89% employ fewer than 20 employees. Statistically, if you are a U.S. business owner, your entity will not likely qualify for any of the 23 exemptions, and we would encourage you to seek advice regarding CTA compliance.

Stay tuned…

If your entity is a Reporting Company, what information will you need to report to comply with the CTA?

That question is addressed in the next part of this series.