The new federal law on corporate transparency - what business owners and their advisors need to know now

While further guidance on how the CTA will be enforced has not yet been issued by the Treasury, there are several things businesses owners and their advisors should know now.

Key takeaways from the CTA include:

• No Public Disclosure. The information reported to Treasury will not be made publicly available but will be used on a confidential basis for law enforcement and national security purposes.[1] So for business entities formed in North Carolina, Delaware, and most other states, information about the entity owners [2] will continue to not be available to the public.
  
  
• Individuals to be Identified. While the CTA refers to individuals who own a 25% or greater interest or who exercise substantial control over an entity as “beneficial owners”, it is important to note that this is not limited to individuals who actually own interests in the entity. The CTA refers to “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise”. For example, this will include an individual owning an interest in another entity that owns an interest in the reporting entity.[3]
  
  
• Information Required. An entity is required to identify individuals by full legal name, street address, date of birth, and the number on an individual’s passport, driver’s license, or other government-issued ID.
  
  
• Entities Do the Reporting. The business entity, and not an individual who is required to be identified as a “beneficial owner”, must file the reports with Treasury. Subject to the exemptions noted below, any entity that is created by a filing with a state or that is created under foreign law and doing business in the United States is a “reporting company”.
  
  
• Identifying Number Alternative. An individual may obtain from Treasury an identifying number for use in lieu of the personal information outlined above. Similarly, a business entity that has provided Treasury with the required information regarding its ownership may also obtain an identifying number. An entity may provide its identifying number to a reporting company in which the entity owns an interest in lieu of providing nformation about its ownership to the reporting company. The reporting company then provides Treasury the number of the entity instead of identifying the individuals who own interest in it. This will allow an entity to avoid disclosing information about its ownership to another reporting company.
  
  
• Reporting Updates. A reporting company is required to report any change in the information earlier reported.[4] While the implementing regulations may require earlier reporting, the CTA requires the updating to occur no later than one year after the change occurs. This will require an entity to update its owner information at least annually.
  
  
• Obtaining the Information to be Reported. The CTA itself does not impose on a reporting company’s owners an obligation to provide the reporting company the information required for the reporting company’s compliance with the CTA.[5] Unless this obligation is addressed in the regulations, a reporting company should consider imposing this obligation in its organisational agreements.[6]
  
  
• Existing Entities. Unless exempt (see below), entities that are formed before the regulations take effect will be required to file their first report with the Treasury at the time provided in the new regulations, which the CTA requires to be not later than two years after the regulations’ effective date.
  
  
• New Entities. Unless exempt, entities formed after the regulations’ effective date will be required to file their first report at the time of formation.
  
  
• Identification of Persons Forming Entities. In addition to identifying individuals who are “beneficial owners”, a reporting company will be required to identify an individual who “files” the document to create the entity.[7]
  
  
• Exemptions. Many types of business entities are exempt from the CTA, including public companies, various types of entities for which there is already substantial regulatory reporting, certain tax-exempt entities, general partnerships [8], and certain dormant entities. Of broadest potential impact is an exemption for an entity that has at least 20 full-time employees, more than USD 5 million in annual revenues, and an offce in the US.[9]
  
  
• Penalties. The CTA imposes substantial criminal and civil penalties for “wilfully” failing to report information or providing false information.

Businesses subject to the CTA will face significant new reporting and related record-keeping obligations. However, it is important to note that the CTA requires reporting information that in most cases is already being provided to the Treasury through federal income tax returns. And like income tax return information, the information reported will not be publicly available.

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[1] The preamble to the legislation cites the use of business entities by “malign actors” to conceal their involvement in “illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug traffcking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption”.

[2] Like many other states, North Carolina requires business entities to publicly disclose the names of the persons who manage the entity but not the names of the owners.

[3] Provisions of the CTA suggest that the CTA intends “directly or indirectly” to include such “indirect” ownership.

[4] The CTA literally requires a reporting of any change in the information, such as a change in an individual’s street address.

[5] The CTA prohibits an entity from issuing interests in “bearer form” that can be transferred without registering the identity of the new owner.

[6] As noted later in the text, the CTA imposes civil and criminal penalties for “wilful” failure to provide the required information. It is not yet clear how this standard will be applied if a reporting entity cannot provide the required information about an individual because the individual (or an entity through which the individual owns an indirect interest in the reporting entity) refuses to provide the information. Imposing a contractual obligation on the entity’s owners to provide the required information may help avoid a penalty in this circumstance.

[7] The CTA refers to this individual as the “applicant”. The document creating an entity typically requires the signature of the person or entity causing the new entity to be formed, such as the “incorporator” in the case of a corporation. This need not be an individual but can be another entity, but if it is another entity, an individual is required to sign the document on behalf of that other entity. Is the individual signing the document, whether in his or her own capacity or on behalf of another entity, the applicant? What about an individual, such as a lawyer, who actually submits the document to the state? Presumably, the regulations will help clarify who is the applicant.

[8] As noted earlier in the text, the reporting requirements generally only apply to entities that are created by a filing with a state or that are created under foreign law. Under North Carolina law, creation of a general partnership does not require a filing and so North Carolina general partnerships appear to be exempt from the CTA. It is not clear whether this exemption from the CTA would include a North Carolina registered limited liability partnership that provides liability protection of the partners; this status requires a filing with the state.

[9] This exemption also includes a subsidiary of such an entity and “other entities through which the entity operates”. It is not yet clear whether this includes a “sister” entity that leases property or provides services to the entity.

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