New Federal Ownership Reporting Requirements for Businesses
By: Bryce Morrison
Congress recently enacted the Corporate Transparency Act, which is a law that requires a business to report the identity of its’ owners to the US Treasury Department. Previously, the identity of the owners was largely a private matter. Owners are identified in business records, but those records are private. States generally do not require reporting the identity of owners when a business entity is formed under state law. However, this new Federal law requires reporting ownership information and imposes significant Federal civil and criminal penalties for failure to comply.
The law requires a “reporting company” to file a report. A “reporting company” is any corporation, limited liability company, partnership, or other similar entity formed in the United States. Business entities that are formed under the laws of a foreign country are also required to report if they are registered to do business in the United States. Essentially, every business entity is required to report its ownership to the Federal government, unless an exception applies.
There is a lengthy list of entities that are carved out of the definition of a “reporting company”. Generally speaking, entities on the list are those subject to other forms of regulation. For example, a company whose stock is registered under the Securities Exchange Act of 1934 is not included in the definition of a reporting company. Similarly, neither public utilites nor public charities are included.
The law also requires an “applicant” to report. An “applicant” is any individual who files an application to form any corporation, limited liability company, partnership, or other similar entity formed in the United States or who files an application for an entity formed under the laws of a foreign country to register to do business in the United States. This requirement catches the service professionals who assist in forming or updating the ownership of business entities.
What is Reported?
For each beneficial owner of a reporting company, the report must contain the full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document.
A beneficial owner of a reporting company is an individual who, directly or indirectly, (i) exercises substantial control over the reporting company or (ii) owns or controls 25% of the ownership interests of the reporting company. These individuals may be immediate owners of the stock of a corporation, for example, or they may be individuals that are several layers up the organizational chain. A beneficial owner is not someone who is a nominee, agent, or custodian, but rather is the individual on whose behalf they act. There are no regulations that define what it means to exercise substantial control, but certainly it includes an individual who is able to direct the affairs of the business.
There are a limited set of documents that serve as acceptable identification. They are a nonexpired US passport, a nonexpired state identification card, a nonexpired state driver’s license, and a nonexpired foreign passport (only if the individual does not have the other documents). Many people have driver’s licenses, so this requirement may not be onerous. However, it increases record keeping activity and adds to the details that must be addressed in forming a business.
When is it Reported?
The reporting requirements under the new law take effect when the US Treasury Department issues reporting regulations. Presently, those regulations have not been issued. However, the law requires that those regulations be issued within one year. By early 2022 at the latest, the reporting requirements will probably be in effect.
The required reports must be filed for existing businesses and for newly formed businesses. For existing businesses, a report must be filed within 2 years after the US Treasury Department issues reporting regulations. For newly formed businesses, a report must be filed at the time of formation or registration of the business. A report must also be filed within 1 year of any change in the reported information. It is important for service professionals to notify their clients of these reporting requirements in order for their clients to file on time.
What are the Consequences for Not Reporting?
The law imposes Federal civil and criminal penalties for providing false or fraudulent beneficial ownership information and for willfully failing to report complete or updated beneficial ownership information. The penalties are a civil penalty of $500 per day for each day that the violation goes unremedied and criminal penalties of a fine of up to $10,000 and imprisonment for up to 2 years.
There are no regulations defining what constitutes a willful failure. However, in the related context of failure to file foreign financial bank account reports, a willful failure includes circumstances where the person required to file knows the filing requirement applies and chooses not to file or the person clearly ought to have known that there was a significant risk that the filing requirement was not being met and the person was in a position to find out very easily if it was.
How is the Reported Information Used?
The reported information is stored in a secure databank by the US Treasury Department. Federal and State agencies may request access to the reported information for purposes of national security, intelligence, law enforcement, regulation, and tax administration. Federal agencies may also access the reported information on behalf of a law enforcement agency, prosecutor, or judge of a foreign country. Financial institutions may access the reported information with the consent of the reporting company for the purposes of customer due diligence.
The new requirement to report beneficial owner information to the Federal government is a significant change in the law. It is not part of the usual practice of forming and operating a new business entity to report ownership information and to report changes in ownership information. Businesses and their professional advisors will need to change their procedures to ensure compliance with these new requirements.
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