What is “Beneficial Ownership” under the Corporate Transparency Act?

Business Insights

What is “Beneficial Ownership” under the Corporate Transparency Act?

Jan 8, 2024 | Business Insights

In a move to fortify transparency within corporate America, the enactment of the Corporate Transparency Act (CTA or Act) and its implementing regulations have introduced critical changes to the reporting and disclosure requirements for businesses. A central aspect of this legislation is the concept of “beneficial ownership.” This term, crucial yet complex, is essential for compliance officers, business owners, and stakeholders to fully understand. This blog aims to provide a detailed overview of what “beneficial ownership” means under the CTA and the ensuing responsibilities for beneficial owners.

The Corporate Transparency Act Explained

The CTA, a significant piece of federal legislation, aims to combat financial crimes, such as money laundering and tax evasion, which often hide under the veil of corporate anonymity. The Act aims to bring transparency to the corporate structures of both domestic and foreign business entities operating within the United States. By mandating the disclosure of true ownership information, the CTA empowers law enforcement agencies, financial institutions, and regulatory authorities with the necessary tools to track and combat illicit financial activities.

Reporting Requirements Under the CTA

The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, is responsible for enforcement of the CTA. Under FinCEN regulations that went into effect on January 1, 2024, all “reporting companies” are required to provide FinCEN with both information about the company itself, including full legal name, trade names, business street address, state of formation, and the IRS Tax Identification Number for the reporting company. The reporting company must also disclose to FinCEN personal information about any individual who is a “beneficial owner” of the reporting company, including full legal name, date of birth, current residential or business street address, and state or federal identification, such as a driver’s license or passport. Newly established entities are required to submit this information upon formation, while existing businesses are provided with a compliance period to gather and report this data. Furthermore, businesses are obligated to update their beneficial ownership information with FinCEN whenever there is a change in ownership.

Reporting companies that are in existence as of January 1, 2024, must file an initial report with FinCEN by January 1, 2025. Reporting companies created after January 1, 2024, must file an initial report with FinCEN within ninety days of the date of formation of the entity.

What is a “Reporting Company” Under the CTA?

Subject to certain exceptions, a “reporting company” is defined broadly in the CTA, as encompassing all corporations, limited liability companies, limited partnerships, or other similar business entities, where the company is either created by filing domestically, with a U.S. state, or formed under foreign law and registered through filing to do business in the U.S.  The CTA is expected to impact more than thirty-two million entities, according to Kiplinger’s Personal Finance. Counterintuitive to most federal regulatory requirements, highly regulated entities such as banks and credit unions, tax exempt entities, and large companies with twenty or more employees and $5 million in gross receipts or sales, are exempt from the CTA’s reporting requirements.

Understanding Beneficial Ownership

Under the CTA, “beneficial ownership” is a term that extends well beyond the traditional definition of business ownership. It refers to individuals who either (1) directly or indirectly exercise “substantial control” over a company, or (2) who directly or indirectly own or control a significant portion, i.e., at least 25%, of a company’s ownership interests. This definition is designed to identify those who have actual power or derive significant benefits from a business, going beyond the names that appear on legal documentation. In other words, an ownership interest in the business is not required to be subject to the CTA’s reporting requirements. The CTA’s broad definition aims to pierce through layers of corporate structures, often complex and intentionally opaque, to reveal the individuals who truly hold power and benefit financially.

The rigorousness of these reporting requirements underscores the CTA’s commitment to eliminating anonymous shell companies and other opaque corporate structures often used for illegal purposes. By ensuring that the true ownership of companies is publicly known and easily traceable, the CTA plays a crucial role in maintaining the integrity of the financial system and combating financial crimes.

Implications of Non-Compliance

Compliance with the CTA is not merely a legal formality; it is an essential aspect of corporate governance and risk management. Non-compliance can result in severe consequences, including hefty fines from $500 a day up to $10,000, and in some cases potential criminal charges. It is imperative for companies and beneficial owners to understand these requirements and ensure their information is accurate, complete, and updated as needed.

The Impact on Businesses and Individuals

The CTA’s beneficial ownership reporting requirements have far-reaching implications for businesses and individuals. It necessitates a reevaluation of existing corporate structures and governance practices to ensure transparency and compliance. Companies may need to enhance their internal processes for collecting and maintaining ownership information. This transition may pose challenges, particularly for smaller businesses or those with complex ownership structures, but it is a necessary step towards a more transparent corporate environment.

Beneficial owners who are concerned about the disclosure to FinCEN of their personal information under the CTA may apply for a unique FinCEN Identifier, which entails a one-time disclosure to FinCEN of the beneficial owner’s name, address, date of birth, and government-issued identifying document, such as a passport or driver’s license, and then can utilize the FinCEN Identifier number for multiple applications as a beneficial owner or company applicant.

Conclusion

The Corporate Transparency Act is a groundbreaking step towards eliminating the cloak of anonymity that has long shrouded corporate ownership in the United States. Understanding and complying with its requirements, especially regarding beneficial ownership, is not only a legal necessity but a step towards fostering a more transparent, responsible, and ethical business environment. As we navigate these changes, the emphasis on transparency and accountability will undoubtedly have a positive impact on the business landscape.

If you have questions about the new CTA filing requirements or obtaining a unique FinCEN identifying number, please contact Doug Taylor at (703) 525-4000 or rdougtaylor@beankinney.com, or your current Bean Kinney & Korman attorney.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.

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