We put together these FAQs in response to questions we've received in emails. Keep those questions coming!
1. What is the citation for the Corporate Transparency Act of 2020 (the "CTA")?
The CTA is Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283 (January 1, 2021) (the “NDAA”). Division F of the NDAA is the Anti-Money Laundering Act of 2020, which includes the CTA.
Section 6403 of the CTA, among other things, amends the Bank Secrecy Act (BSA) by adding a new Section 5336, Beneficial Ownership Information Reporting Requirements, to Subchapter II of Chapter 53 of Title 31, United States Code.
2. Where are the implementing regulations for the CTA?
The regulations are not yet effective, but the December 7, 2021 Notice of Proposed Rulemaking (and the proposed regulations) are available here.
3. Does the CTA apply to all companies?
The CTA applies to any company (a) formed in the United States by the filing of a document with the Secretary of State (or any similar official) of any state or Tribal Government, or (b) formed outside the United States and registered to do business in the United States by the filing of a document with the Secretary of State (or any similar official) of any state or Tribal Government.
Some companies that would otherwise be subject to the CTA, however, are exempt from the CTA’s reporting requirement.
4. What companies are exempt from the CTA’s reporting requirement?
The CTA exempts 23 categories from its reporting obligations. Generally speaking, exempt entities are those that are already subject to some form of regulation that identifies the individuals who are the beneficial owners of the entity or who are otherwise in control of the entity.
The 23 exemption categories are listed in subsection (c)(2) of the proposed regulation and include:
- SEC reporting issuer (an entity that files financial reports with the SEC under Section 12 or Section 15(d) of the Securities and Exchange Act of 1934)
- Governmental authority (U.S. federal, state and tribal governmental authorities)
- Credit unions
- Any “money transmitting business” licensed by FinCEN
- Any “investment company” or licensed “investment advisor”
- Any state-licensed insurance producer
- Any public accounting firm
- Any public utility
- Any tax-exempt entity (including any charity that is exempt from income tax under IRC Section 501(a) and other listed types of tax-exempt entities)
- Any “large operating company” defined as an entity that (1) has more than 20 full time employees in the U.S., (2) has an “operating presence at a physical office” in the U.S., and (3) had more than $5,000,000 in gross revenues as reported on a federal income tax return for the previous year.
- Any entity of which the ownership interests of such entity are controlled or wholly owned, directly or indirectly, by one or more entities described in paragraph (c)(2)(i), (ii), (iii), (iv), (v), (vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi), (xvii), (xix), or (xxi) of this section.
** This is not a complete list. Refer to subsection (c)(2) of the regulation for a complete list and for important definitions of the terms used. **
5. What is the charitable entity exemption?
“An organization that is described in section 501(c) of the Internal Revenue Code of 1986 (Code) (determined without regard to section 508(a) of the Code) and exempt from tax under section 501(a) of the Code, except that in the case of any such organization that ceases to be described in section 501(c) and exempt from tax under section 501(a), such organization shall be considered to be continued to be described in this paragraph (c)(2)(xix)(A) for the 180-day period beginning on the date of the loss of such tax-exempt status;”
6. What must a reporting company’s beneficial ownership report include?
The beneficial ownership report must include five specified items of information for each beneficial owner and each company applicant: (a) full legal name, (b) date of birth, (c) residential address (except that a company applicant who is in the business of forming companies may provide a business address), (d) a “unique identifying number” (from a specified list of documents, including an unexpired U.S. drivers license or an unexpired U.S. passport), and (e) an image file of the document that provides the unique identifying number.
For individuals who are not U.S. persons, the “unique identifying number” may include a non-U.S. drivers license, a non-U.S. passport, or a national identity card.
7. Who is a beneficial owner?
A beneficial owner is a natural person who either (a) owns 25% or more (directly or indirectly) of the equity interest in the reporting company, or (b) has substantial control over the reporting company.
8. What is the definition of “substantial control”?
The draft regulation provides that “substantial control includes:”
(i) Service as a senior officer of the reporting company;
(ii) Authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body);
(iii) Direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company, including but not limited to:
(A) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
(B) The reorganization, dissolution, or merger of the reporting company;
(C) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
(D) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;
(E) Compensation schemes and incentive programs for senior officers;
(F) The entry into or termination, or the fulfillment or non-fulfillment of significant contracts; and Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; and
(iv) Any other form of substantial control over the reporting company.”
9. Are there any types of person who are excluded from the beneficial ownership reporting obligation?
Yes, the following persons do not need to be included in a reporting company’s beneficial ownership report:
- A minor child, as defined in the state in which the entity is formed, if the information of the parent or guardian of the minor child is reported in accordance with this section;
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
- An individual acting solely as an employee of a corporation, limited liability company, or other similar entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person;
- An individual whose only interest in a corporation, limited liability company, or other similar entity is through a right of inheritance; or
- A creditor of a corporation, limited liability company, or other similar entity, unless the creditor meets the requirements of . . . . subparagraph (A).
10. Who is the “company applicant”?
For a domestic reporting company, the “company applicant” is the individual “who files the document that creates the domestic reporting company . . . . including any individual who directs or controls the filing of such document by another person.” For a foreign reporting company, it is the “individual who files the document that first registers the foreign reporting company . . . . including any individual who directs or controls the filing of such document by another person.”
In most situations, the “company applicant” will be the attorney or other professional who signs as the “incorporator” or “organizer” of the reporting company on its articles of incorporation or articles of organization.
11. How should a reporting company address a deceased company applicant?
“If a reporting company was created or registered before [effective date of the final rule], and any company applicant died before [one year after effective date of the final rule], the report shall include that fact, as well as any information required under paragraph (b)(1) of this section of which the reporting company has actual knowledge with respect to such company applicant.”
Last updated January 28, 2022
: FinCEN issued its