02.09.2021 Congress Imposes Sweeping Beneficial Ownership Disclosure Requirements in the Corporate Transparency Act
With the stated goal of “counter[ing] money laundering, the financing of terrorism, and other illicit activity,” the Corporate Transparency Act (the “Act”), adopted on January 1, 2021, imposes novel beneficial ownership disclosure requirements on corporations, limited liability companies, and “similar entit[ies]”. For the first time, reporting companies will be required to register “personally identifiable information” of their “beneficial owners” with FinCEN, the Treasury Department’s Financial Crimes Enforcement Network. Clients would do well to take these new obligations seriously, as willful noncompliance exposes an offender to up to 2 years of imprisonment and a $10,000 fine.
Small businesses likely will be most affected by the Act. The disclosure requirements do not apply to any entity with (i) more than 20 full-time employees in the United States, (ii) more than $5,000,000 in gross receipts or sales, as shown on the previous year’s federal income tax return, and (iii) a U.S. based “physical office.” Meanwhile, heavily regulated companies, including banks, brokers and broker dealers, publicly traded companies, and investment companies, along with certain of their subsidiaries, likewise are generally exempt.
Unfortunately, there is some ambiguity in the statute’s applicability. Presumably, limited partnerships and statutory trusts are “similar” enough to corporations and limited liability companies to fall within the Act’s reach, though that is not yet certain. It is also not clear whether a company with $5 million in receipts, more than 20 full-time, remote employees, and a mailing address at the founder’s home, has a suitably “physical” office to be excluded from the Act’s disclosure obligations.
Also subject to interpretation is the critical term “beneficial owner.” A person who “exercises substantial control over,” or who “owns or controls not less than 25 percent of the ownership interests” in, a company is a beneficial owner. But what is substantial control? While minor children are excluded from the beneficial owner definition, are the ownership interests of a custodian holding stock on behalf of a child aggregated with those of the custodian in her individual capacity? While creditors are not beneficial owners, may preferred equity look enough like debt that holders of those interests can avoid disclosure? How are different classes of interests aggregated for purposes of the 25 percent rule?
Many questions remain unanswered, though they may be clarified by regulations to be adopted by Treasury no later than January 1, 2022. After adoption, affected entities will need to comply with reporting requirements upon formation, while pre-existing entities will have two years to comply. Williams Mullen will monitor developments as those regulations are adopted.
 Corporate Transparency Act, H.R. 6395 § 6402(5)(D)
 31 U.S.C. § 5336(a)(11)(A)
 Id. § 5336(h)(3)(A)
 Id. § 5336(a)(11)(B)(xxi)
 Id. § 5336(a)(11)(B)
 Id. § 5336(a)(3)(A)
 Id. § 5336(a)(3)(B)(i)
 Id. § 5336(a)(3)(B)(v)
 Id. § 5336(b)(5)
 Id. § 5336(b)(C)
 Id. § 5336(b)(B)