What Is the Corporate Transparency Act?
The Corporate Transparency Act is a federal law requiring business entities, known as reporting companies, to report specific information about their beneficial owners. When the law takes effect in 2024, anyone who has created a business entity will need to provide information to the federal government about those who own or have substantial control over the company. They will report this information to the Financial Crimes Enforcement Network, part of the U.S. Department of Treasury. For each beneficial owner, a business entity will have to submit their:
Legal name
Date of birth
Home address
An identifying number from a driver’s license, passport, or other approved document
A photocopied image of that document
Once filed, this information will become part of a FinCEN database. The purpose of the CTA is to create a central resource the government can use to curb illegal activities, such as money laundering and tax evasion, made possible through the creation of anonymous shell companies.
Who Can Access This Information?
Many people are wary of having their personal information become part of a government database. In today’s world, it’s easy to imagine a scenario where this data gets hacked and becomes public information. FinCEN says it has implemented security methods to protect this sensitive information. In addition, no one will have to provide their Social Security Number under the CTA.
According to FinCEN, it will only share the information it collects in certain circumstances. The law allows federal, state, local, and tribal officials to request beneficial ownership information through a federal agency. These requests must be for matters of national security, intelligence, or law enforcement. With an entity’s consent, financial institutions can also access the information in certain circumstances.
Reporting Company Definition
The term “reporting company” is central to the CTA, but what does it mean? Under the law, a reporting company refers to a domestic company that has registered with the state’s secretary of state, a similar state office, or a tribal organization. The law also applies to foreign companies that have registered to do business in the United States.
For the most part, reporting companies include corporations, LLCs, limited partnerships, and business trusts. For example, if you’ve set up an LLC for real estate investing, you will be required to report the beneficial owners who own at least 25% of the company or who have substantial control over the LLC. While the law has good intentions, it will no doubt create an additional burden for small business owners.
Beneficial Owner Definition
Now that you know what companies have to report, you need to know who they will have to report, otherwise known as the beneficial owners. Under the law, a beneficial owner is defined as anyone who owns at least 25% of the entity’s ownership interests. It also includes anyone with substantial control over a company’s operating decisions. Who is and isn’t a beneficial owner is a core part of the CTA, so let’s break this definition down even further.
What Counts as an Ownership Interest?
An ownership interest is an arrangement that gives you at least 25% of the company’s ownership rights. You’re considered a beneficial owner whether you own or control those interests individually or through various business entities. An ownership interest includes any of the following:
Equity
Stock
Voting rights
Capital or profit interest
Convertible instruments
Options to buy or sell any of the above
Any other instrument, contract, or mechanism to establish ownership
Related: Corporate Transparency Act: What It Means For Business Owners!
What Counts as Substantial Control?
The second part of the beneficial ownership definition is less clear. An individual has substantial control if they have influence over a company’s operational decisions. FinCEN says anyone who falls into one of these four categories is considered to have substantial control:
A senior officer of a company, such as a president, chief financial officer, or general counsel
Someone who has the authority to appoint or remove a senior officer or a majority of the board of directors
Someone who makes important decisions about the company’s structure, finances, or business nature
Someone who exercises substantial control in another way, such as through flexible corporate structures
Who’s Exempt From Being a Beneficial Owner?
There are five exemptions for people who would otherwise be considered beneficial owners under the CTA. A beneficial owner cannot be:
A minor
A nominee, intermediary, custodian, or agent of the beneficial owner
An employee (not a senior officer) who has substantial control only because of their employment
An inheritor whose only ownership interest comes from a future inheritance
A creditor whose only ownership interest comes from a loan, debt, or similar predetermined payment