CT expert insights: Understanding beneficial ownership reporting, with Sandra Feldman

The Corporate Transparency Act went into effect at the beginning of January, which means that many businesses must file a beneficial ownership report. In this edition of Expert Insights, CT’s Corporate Publications Attorney, Sandra Feldman, explains what this new report is and its implications for your business. Learn why the reports are needed, what types of businesses need to file, and how to actually get that done in order to avoid steep penalties.

Transcript:

Greg Corombos: Hi, I'm Greg Corombos, my guest this week on Expert Insights is Sandra Feldman, publications attorney at CT Corporation. Today, we're going to be talking about a new law called the Corporate Transparency Act that small business owners might be hearing about nowadays. And it's going to require the filing of what's known as a Beneficial Ownership Report with the federal government. So yes, more paperwork.

But Sandra is here to tell us some more about what this new filing is, including who has to file a report, when it has to be filed, and what information needs to be filed. So a lot to go over here. And Sandra, it's always good to have you with us.

Sandra Feldman: Thank you, Greg. It's good to be here. And it's true, there is a new filing requirement coming soon, that will affect small businesses. And this filing, as required by federal law, which, as you noted, is called the Corporate Transparency Act, which was just enacted by Congress on January 1st.

And to put it in a nutshell, the Corporate Transparency Act says that all LLCs and corporations that are not otherwise exempt have to file a report with the Department of Treasury's Financial Crimes Enforcement Network, that is known as FinCEN, that identifies the individuals who own and control those companies.

And the Corporate Transparency Act also requires FinCEN to adopt regulations that will provide us with the details of how this will work. And that hopefully will clear up a lot of the questions that those of us who read the act currently have, and FinCEN has up to one year to adopt those regulations.

GC:  Sandra, can you tell us, first of all, why Congress is requiring small businesses to file a beneficial ownership report?

SF: Well, this may surprise some people, but the main purpose is to combat money laundering. Now, there are some bad people out there who are forming anonymous shell companies and using them to launder money and finance terrorism and commit other criminal acts. Law enforcement authorities say they're having trouble detecting and preventing these activities because they don't know the identity of the people who really own these companies, and who are benefiting from their illegal activities. And they don't know their identities, because the states don't collect beneficial ownership information upon the formation of business entities.

So now, the federal government, via FinCEN, will collect this information. And FinCEN will be authorized to disclose it to the federal agencies that are involved in national security, intelligence, and law enforcement.

GC: So who has to file the beneficial ownership report? And will all small businesses need to file it?

SF: What the Corporate Transparency Act says is that every LLC, corporation, or other similar entity formed under state law has to file a report unless otherwise exempt. And you may have noticed I said LLC, corporation, or other similar entity. But right now, no one knows what's meant by other similar entity. That's something FinCEN will have to clarify in the regulations. So I'm only going to talk about LLCs and corporations for now. But know that if you own one of those other similar entities, all of this applies to you too.

GC: Yeah. Specificity is good. A little clarification would be very helpful for a lot of folks out there. Sandra, you mentioned LLCs and corporations are definitely in the mix here. So which ones are exempt and therefore don't have to file a beneficial ownership report?

SF: There are over 20 exemptions in the act. So not all LLCs and corporations have to file a beneficial ownership report. A lot of the exemptions are for companies that are already subject to federal regulation and already filed reports with federal agencies. And that includes publicly traded companies, tax-exempt nonprofits, and financial institutions.

But the exemption that will be the most relevant to most small businesses says an LLC or corporation is exempt and won't have to file a beneficial ownership report if it: A) has more than 20 full-time employees; B) filed a tax return for the previous year reporting more than $5 million in gross receipts or sales; and C) has a physical presence in which it operates its business in the United States.

And you need all three, A, B, and C to be exempt.

GC: So for those LLCs and corporations that still do have to file a beneficial ownership report, what kind of information needs to be reported?

SF: The report has to provide the full name, date of birth, residence or business address, and an identification number from a passport, driver's license, state ID, or an ID number that can be obtained from FinCEN. And that has to be provided for each beneficial owner and applicant of the company.

GC: So who's considered a beneficial owner of an LLC or a corporation.

SF: The beneficial owner is defined as an individual who directly or indirectly exercises substantial control over the LLC or corporation, or who owns not less than 25% of its ownership interests. And what constitutes substantial control is another one of those issues FinCEN will have to clarify for us and its regulations.

GC: Yeah, finCEN’s got a little more work to do here it sounds like. You say this information has to be provided for an applicant too. Who would be considered an applicant?

SF: An applicant is defined basically to mean any individual who files an application to form an LLC or corporation.

GC: So when do these beneficial ownership reports have to be filed?

SF: First, it's important to know that reporting will not begin until FinCEN has adopted its regulations, which as I mentioned earlier, has to be done within one year. So really, we don't know for sure if reporting will begin soon, or if it won't begin until next January. But we believe FinCEN will take its time, so it's more likely to begin later than sooner.

But once FinCEN has adopted those regulations, all LLCs, corporations, and other similar entities –and we should know what an “other similar entity” is by then – that were formed before the regulations were adopted, and that are not exempt, will have two years to file their first beneficial ownership report.

And LLCs, corporations, and other similar entities formed on or after the date the regulations are adopted, have to file their beneficial ownership report upon formation. And the state filing offices are required to provide notification of this obligation and access to the form that's filed with FinCEN.

GC: What about reporting any changes in the information? How do you go about that?

SF: Well, what the act says is that upon a change in the beneficial ownership information, the reporting company has to update the information with FinCEN within one year of the change. But it also gives the Treasury Department authority to require a shorter period of time, if it finds it necessary to do so.

GC: Where will this beneficial ownership information be kept? And will the public have access to it?

SF: Well, FinCEN will keep the report and information in a database that will not be accessible by the public. And FinCEN is only authorized to disclose the reported information to a limited group of people, including federal law enforcement agents involved in stopping money laundering and other illicit activity, state law enforcement agencies–but only with a court order–and financial institutions to help them with their due diligence responsibilities, but only with the reporting company's consent.

So Greg, if you are on make a request to FinCEN, for some of this information, you will be turned down. And in fact, there are stiff penalties for any government employee who discloses the information from this database to someone not authorized to receive it.

GC: Well, that's one set of penalties. Speaking of other penalties, though, what are the penalties for small businesses that fail to file a beneficial ownership report?

SF: They're pretty stiff. A willful failure to make a required filing carries a civil penalty of up to $500 per day and fines of up to $10,000 and two years in prison.

GC: Wow, that is quite stiff. So although reporting may not begin for a while, is there something small businesses ought to be doing now?

SF: Yes, there is. Anyone who owns an LLC or corporation should be asking themselves: is my LLC or corporation exempt? And they may want to get some legal advice if they're not sure. And if their LLC or corporation is not exempt, they should start gathering the information they'll need to put in a beneficial ownership report. And they should make sure to keep that information up to date so that they'll be ready when the time comes to file their first beneficial ownership report with FinCEN and avoid those penalties.

GC: Yes, always better to be prepared for the soonest possible filing deadline than hoping it'll be next year or some other time.

Sandra, excellent information. Great to have everybody caught up on an important issue like this. Really appreciate your time today. Thank you.

SF: Thank you, Greg.

GC: Sandra Feldman is publications attorney at CT Corporation. I'm Greg Corombos, and for more information on this subject, refer to this article, The Corporate Transparency Act imposes new beneficial ownership reporting obligations on business entities.