Certain Limited Liability Companies and Corporations Now Required to Report Their Beneficial Owners – Corporate Transparency Act

Tucked away in the lengthy National Defense Authorization Act for Fiscal Year 2021 (NDAA) is the little-known Corporate Transparency Act.  The Act affects certain limited liability companies and corporations (especially those that are closely held) and requires disclosure of certain beneficial owners of the entities.  The NDAA passed both the House and Senate earlier this month and has been presented to the President. See here. The full NDAA can be found here. The Corporate Transparency Act begins on page 2950.

While the Act is intended to prevent money-laundering and other malfeasance by shell and holding companies, it broadly applies to “reporting companies,” which are defined as

[A] corporation, limited liability company, or other similar entity that is—

 (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or

 (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.

 However, the Act contains numerous exclusions that generally exempt (among other entities) regulated publicly traded corporations, banks and registered broker-dealers.  Perhaps most important for typical limited liability companies and corporations is the exemption for any entity that (a) employs more than 20 employees on a full-time basis in the United States, (b) filed in the previous year federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or aggregate sales, and (c) has an operating presence at a physical office within the United States.

For those covered reporting companies created after the enactment of the Act, they must, at the time of creation, disclose their “beneficial owners,” which are defined as

[A]n individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—

 (i) exercises substantial control over the entity; or

 (ii) owns or controls not less than 25 percent of the ownership interests of the entity.

 Of note, the Act does not define “substantial control,” so passive investors with less than 25% ownership may be exempt. As with the definition of reporting companies, there are several exceptions to those who are considered beneficial owners.  For example, an individual whose interest is through inheritance or a creditor need not be disclosed (unless the creditor independently meets the substantial control test or 25% threshold).

Covered reporting companies already in existence must disclose beneficial owners within two years, and companies must report any changes to reporting within one year of the change. Reports are to be made to the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) and must identify beneficial owners by (a) full name, (b) date of birth, (c) current residential or business street address, and (d) a unique identifying number from an acceptable identification document (defined in the Act, i.e. driver’s license, passport) or a FinCEN identifier. Beneficial owner information will be kept confidential and will generally only be disclosed for law enforcement purposes or, with the consent of the reporting company, for due diligence requirements by financial institutions. 

Finally, the Act requires the IRS to take reasonable steps to provide notice of these reporting obligations and encourages states to provide notice at the time of entity registration or renewal.

While the Act will not materially affect most smaller LLCs and corporations other than the added reporting requirement, those who utilize these business forms for their inherently opaque structure may find themselves under greater scrutiny. Nevertheless, businesses and accountants should keep an eye out for anticipated implementing regulations and should closely examine the statute to determine if they, or their clients, are subject to its requirements.