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The Corporate Transparency Act: Blinding Small Businesses to Shine a Light on Corporate Malfeasance

On Behalf of | Aug 10, 2022 | Slingshots

If you are a small business owner, your regulatory burden is about to increase thanks to the “Corporate Transparency Act” (“CTA”).[1] Buried deep within the 2021 National Defense Authorization Act, the [2] CTA requires the beneficial owners and applicants of reporting companies be reported to the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”). According to Congress, one of the CTA’s goals is to aid the fight against money laundering, the financing of terrorism, and other illicit activity,[3] where bad actors often seek to conceal their identity through corporate ownership.[4] Under the CTA, the anonymity some corporate owners previously enjoyed will no longer be possible.

Each reporting company must submit a report to FinCEN to comply with the CTA.[5] A reporting company includes: (1) a corporation; (2) a limited liability company; or (3) other similar entities created by filing with a secretary of state or similar office.[6] Notably, this definition only covers companies created by a filing,[7] and thus business entities not created through filing need not to report to FinCEN under the CTA. There is also a long list of exceptions that might exempt some entities from being placed in the “reporting company” box.[8] However, most exceptions apply to entities in the finance and insurance business and are unlikely to apply to the average company.[9] Some notable exceptions include 501(c) non-profits, political organizations, and larger entities.[10]

Each entity that qualifies as a reporting company must report the identity of applicants and “beneficial owners” to FinCEN.[11] The CTA defines beneficial owners as individuals who, directly or indirectly, exercise “substantial control” over the reporting company or control or own twenty-five percent  (25%) or more of the reporting company,[12] while applicants are those who file an application to form a reporting company.[13] Like reporting companies, there are exemptions to being labelled a beneficial owner. For example, a beneficial owner does not include a minor child; an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; employees of an entity whose economic benefit comes solely from their employment at that entity; individuals whose only interest in an entity lies in inheritance; and creditors.[14]

While the CTA is clear on who is not a beneficial owner, who is a beneficial owner by exercising substantial control over an entity is not clear. FinCEN has proposed a rule to address this ambiguity, setting out three indicators of substantial control: (1) “Service as a senior officer”; (2) “authority over the appointment or removal of any senior officer or dominant majority of the board of directors”; and (3) “direction, determination, or decision of, or substantial influence over, important matters”.[15] This rule is not yet final, but it indicates FinCEN’s intent to limit the scope of substantial control.

The reporting requirements created by the CTA for reporting companies may not appear overly burdensome for a larger company, but forr small business owners, this additional burden is palpable. This is especially salient as the reporting requirements and timing must be strictly adhered; failure to comply will result in steep criminal and civil penalties.[16] A reporting violation can result in fines of $500 per day that a violation continues, up to $10,000 and imprisonment for two years.[17] A reporting company must provide identifying information for its beneficial owners and applicants.[18] This information includes the individual’s name, date of birth, current address, and a unique identifying number from an acceptable identification document.[19] This requirement will apply to entities formed after FinCEN’s final rules go into effect, as well as currently existing entities.[20] Once the final rules go into effect, all reporting companies created before the rules’ effective date will have a limited time after the rules’ effective date to file with FinCEN.[21] While the CTA provides a period of up to two years for such companies,[22] FinCEN intends to limit this period to one year through its proposed amendments to the Code of Federal Regulations.[23] On the other hand, reporting companies formed on or after the effective date of FinCEN’s rules will have fourteen days after formation to file with FinCEN.[24]

As a small business owner, you should keep a close eye on the development of this regulation, as the regulatory burden it imposes carries significant penalties for failing to comply.

If you have questions about meeting the new reporting requirements created by the CTA and FinCEN’s proposed rules, please contact the experienced government contract and business attorneys at Eckland & Blando LLP.

[1]              Research and drafting assistance provided by Adrian Kipp, law clerk at Eckland & Blando LLP.

[2]              Corporate Transparency Act, Pub. L. 116-283, tit. LXIV, § 6401 et seq., 134 Stat. 4604 (2021).

[3]              Id.  § 6402(5)., 134 Stat. 4604 (2021).

[4]              See id. § 6402(3).

[5]              31 U.S.C. § 5336(b)(1)(A), (b)(2)(A) (2021).

[6]              Id. at (a)(11)(A)(i).

[7]              Id.

[8]              Id. at (a)(11)(B)(i)-(xxiv).

[9]              See, e.g., id. at (i), (iii)-(xv), (xvii)-(xviii), (xx).

[10]             Id. at (xix)(I)-(II), (xxi) (an entity with more than 20 full-time employees, that has filed Federal income tax returns demonstrating more than $5,000,000 in gross sales, and that has an operating presence at a physical office, all within the United States, is not a reporting company).

[11]             Id. at (b)(1)(A), (b)(2)(A).

[12]             Id. at (a)(3)(A).

[13]             Id. at (a)(2), (a)(11).

[14]             Id. at (a)(3)(B).

[15]             Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69,920, 69,933-34 (proposed Dec. 8, 2021).

[16]             31 U.S.C. § 5336(h)(3).

[17]             Id. 

[18]             Id. at (b)(2)(A)(i)-(iv).

[19]             Id. 

[20]             Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69,920, 69,970 (proposed Dec. 8, 2021).

[21]             Id. 

[22]             31 U.S.C. § 5336(b)(1)(B) (2021).

[23]             Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69,920, 69,970 (proposed Dec. 8, 2021).

[24]             The CTA provides that such a company must file “at the time of formation or registration.” 31 U.S.C. § 5336(b)(1)(C) (2021). However, FinCEN’s proposed rules allow fourteen days. Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69,920, 69,970 (proposed Dec. 8, 2021).

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