ComplianceJanuary 31, 2022

CT Expert Insights: Preparing now for the Corporate Transparency Act

The Corporate Transparency Act (CTA) was enacted in January 2021. It required LLCs, corporations, and other entities to file a report with FinCEN unless they qualify for an exemption. As of December 8, 2021, FinCEN has proposed a rule to implement the CTA. In this edition of Expert Insights, CT Corporation’s Publications Attorney, Sandra Feldman, discusses what companies can do now to prepare for the beneficial ownership reporting requirement that will be necessary as a result of the CTA.

Sandra reviews the useful information companies can glean from the proposed rule, including who has to file a report, when it has to be filed, and the necessary information to prepare. Learn if your company is considered a reporting company and whether it qualifies for an exemption. Sandra also discusses who is considered a beneficial owner and what information you can prepare in advance as we wait for FinCEN’s proposal to move to the next phase.


Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Sandra Feldman, Publications Attorney at CT Corporation. She joined us a few months back to discuss the Corporate Transparency Act. But she's here today to give us an update, specifically on what companies can do now to prepare for the beneficial ownership reporting requirement that will be necessary as a result of the Corporate Transparency Act. And Sandra, Happy New Year, first of all, and thanks as always, for being with us.

Sandra Feldman: Thank you, Greg, Happy New Year to you as well.

GC: Well, can you first of all, remind us what the Corporate Transparency Act is and does? I know we talked about it a few months ago, but we can always use a little bit of a refresher.

SF: Oh, sure. The Corporate Transparency Act was enacted by Congress way back in January of 2021. And the Corporate Transparency Act requires LLCs, corporations, and certain other entities¬—unless they qualify for an exemption—to file a report with the Division of the Department of Treasury called the Financial Crimes Enforcement Network, or as it's better known, FinCEN. And that report has to provide personal identifying information about the entities individual beneficial owners and applicants, and FinCEN will maintain that information in a private database that can only be accessed by certain federal agencies, as well as certain state agencies with a court order and financial institutions with the company's consent.

And Congress believes that having a registry containing that personal information will help prevent corrupt actors, terrorists, and criminals from forming and using anonymous shell companies to launder money in the United States. The Corporate Transparency Act itself describes this reporting requirement in broad terms, and FinCEN was directed to provide the details through its rulemaking authority.

GC: Sandra, I understand we now have a proposed rule in the works providing some of those details. What do we know about that so far?

SF: That's right. On December 8, FinCEN, published its first proposed rule to implement the Corporate Transparency Act. And the proposed rule deals mainly with who has to file a report, when it has to be filed and what information it has to contain.

And although it's just a proposed rule, and not the final rule, it provides us with enough information to say what companies or, to be more exact, what the company's owners, management lawyers, or whoever is responsible for its compliance obligations, what they should do now to prepare for the day when the reporting requirement goes into effect, because we know that day is coming.

GC: So what steps should companies be taking to prepare for this?

SF: Well, the first step is to determine if the company is a reporting company. Because only reporting companies are required to file a report. And whether it is a reporting company depends upon two things: what type of entity it is, and whether it qualifies for an exemption.

GC: So what kinds of entities are considered reporting companies and need to pay attention to this?

SF: Well, we have two kinds of reporting companies: domestic and foreign. And the proposed rule defines a domestic reporting company as a corporation, LLC, or other entity created by filing a document with the Secretary of State or similar office under the laws of a state or Indian tribe.

A foreign reporting company is a corporation, LLC, or other entity formed under the laws of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document there.

So. the one thing we know for sure, based on those definitions, is if you've got an LLC or a corporation, you've passed the first test and determining if your company is a reporting company. So, the next step is for you to determine if the company qualifies for an exemption. And if so, it's not a reporting company.

GC: Well, that could be good news. So, what kind of companies are exempt from the definition of a reporting company?

SF: Well, this rule has 23 exemptions. And, no, I'm not going to name them all. But mostly of the companies that are already heavily regulated, including publicly traded companies, financial institutions, public accounting firms, insurance companies, and tax exempt organizations. There's also an exemption for what the proposed rule calls a large operating company,

GC: What exactly is a large operating company?

SF: That's defined by the proposed rule as any entity that employs more than 20 full time employees in the United States, has an operating presence at a physical office within the United States, and filed a federal income tax or information return for the previous year, demonstrating more than $5 million in gross receipts or sales.

GC: We're talking with Sandra Feldman Publications Attorney at CT Corporation, about the Corporate Transparency Act and beneficial ownership reporting requirements. And, Sandra, if a company doesn't qualify for an exemption and is in fact a reporting company, what does it do next?

SF: Reporting companies are going to have to provide FinCEN with personal identifying information about all of their beneficial owners in company applicants. So, the next step is for them to identify who their beneficial owners and company applicants are.

GC: Who is officially considered a beneficial owner?

SF: The proposed rule defines a beneficial owner as any individual who directly or indirectly either exercises substantial control over the reporting company, or owns at least 25% of its ownership interests.

GC: We're learning all sorts of stuff today. What does it mean to exercise substantial control over a company?

SF: The proposed rule defines substantial control to include, but is not limited to, serving as a senior officer, having authority over the appointment or removal of senior officers or a majority or dominant minority of the governing body, and directing, determining or deciding, or having substantial influence over important matters affecting the company.

GC: What about a company applicant? How is that one defined?

SF: The proposed rule defines the company applicant of a domestic reporting company, as any individual who files a document that creates the company, including any individual who directs or controls the filing of that documents.

And for a foreign reporting company, the company applicant is any individual who files the document that first registers the company to do business, including any individual who directs or controls the filing of that documents.

GC: Okay, so we've identified the beneficial owners and the company applicants. What's the next step?

SF: The next step is to start gathering the personal information about the beneficial owners and company applicants that will have to be reported to FinCEN.

GC: And what information does that include?

SF: There are four pieces of information for each beneficial owner and company applicant. And that's their full name, date of birth, current address, and the unique identifying number from an acceptable document, which includes a non-expired passport, state ID card, or driver's license. And the reporting company also has to provide an image of the identification document that shows both the identifying number and a photograph of the person.

Or there's an alternative. Beneficial owners and company applicants can apply to FinCEN for a FinCEN identifier, which is a unique number FinCEN assigns that individual. The application for a FinCEN identifier has to contain all the information I just mentioned, that otherwise has to be reported. And if a beneficial owner or company applicant obtains a FinCEN identifier, they can give that to the reporting company and the reporting company can include the FinCEN identifier in the report, instead of the individual pieces of information.

So, that's something else companies can actually do now. They can ask the beneficial owners and company applicants if they want to obtain a FinCEN identifier rather than providing personal information directly to the company.

GC: What other information might need to be reported?

SF: The proposed rule also requires information about the recording company, namely, it's full name, any trade or DBA names, its business street address, its date of formation if it's a domestic company, or its first date of registration if it's a foreign company, and its IRS Taxpayer Identification Number, or if it doesn't have one yet, it's DUNS number or legal entity identifier.

And the reporting company can also obtain a FinCEN identifier by submitting an application with or after the initial report. So that's another decision that can be made now, even though they can't submit the application yet. And that's whether the company should apply for a FinCEN identifier when the time comes.

GC: Alright, so we're getting further down the path here has Sandra, once the company determines it is a reporting company, and it collects the required information from beneficial owners and company applicants, what should it do next?

SF: Well, eventually, the next step will be to file the initial report. But we aren't there yet. Reporting won't start until the effective date of the final rule. And we're still in the proposed rule stage. But something companies can do now that will really benefit them when reporting starts, is to come up with a system to keep track of all the information that they'll report to FinCEN because there'll be required to file an updated report within 30 days of any change in that information.

GC: Do we have any idea, Sandra, when reporting will actually begin when this rule be finalized and so forth?

SF: We won't know for sure until we have a final rule. So, I can't tell you exactly when reporting will begin. But I can tell you, the members of Congress have told the Treasury Department they want to get this started sooner rather than later. And the White House has said that combating money laundering is a priority. So you can take from that what you will.

But once we do have an effective date, the proposed rule says reporting companies formed or registered to do business on or after the effective date will have to file their initial report within 14 days of formation or registration, and reporting companies in existence or having registered before the effective date will have up to one year after the effective date to file their initial report. So that's something else existing companies can start thinking about now. Where they’ll want to get this reporting obligation out of the way, or wait until closer to the deadline.

GC: A lot of good advice on due diligence here, Sandra and what to expect once this actually becomes a rule that's in effect. Any final thoughts or advice as we exit here?

SF: I should just give you a reminder that we still don't know all the details about this reporting requirement. For instance, FinCEN hasn't announced yet the format or mechanism for filing documents with them. And the proposed rule still leaves some issues unresolved that hopefully will be resolved in the final rule. So, stay tuned, because we'll probably have some more information to share with you before reporting actually gets underway.

GC: I think a lot of folks will be glad to have this information whenever it does become required. Sandra, thank you very much as always for your time and your great information.

SF: Thank you.

GC: Sandra Feldman is Publications Attorney at CT Corporation. I'm Greg Corombos reporting for Expert Insights. For more information on this topic, please call CT at 844-787-7782.

Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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