Effective January 1, 2024, the Corporate Transparency Act (CTA) requires many small and medium corporate entities and trusts to report certain beneficial ownership information to the Treasury's Financial Crimes Enforcement Network (FinCEN).
These reporting and disclosure requirements apply to many popular wealth transfer structures, such as limited liability companies, and the common forms of beneficial ownership of those structures, such as trusts and family limited partnerships. In fact, many of these layered structures are dual purpose: They are designed to achieve the efficient management and transfer of a family's wealth while preserving maximum privacy. The CTA may make it more difficult to achieve the level of privacy many families may desire. One caveat: Disclosures and information provided pursuant to the CTA are not publicly available and apparently not subject to Freedom of Information Act requests.
Let's look at the framework. A word of caution: Interpretation and application of the CTA is complex, and the following is by no means a comprehensive analysis. And, because it's a new law, more guidance and direction are likely forthcoming, which could impact how the CTA will be applied and interpreted by FinCEN (see footnote 1 regarding the "Protect Small Business and Prevent Illicit Financial Activity Act"). In fact, on March 1 the US District Court for the Northern District of Alabama issued an opinion declaring the CTA unconstitutional. While the opinion is limited to the parties before the Alabama court, the CTA will likely face other legal challenges that could ultimately shape the reach and application of the act.
The CTA applies to domestic entities doing business in the United States and foreign entities licensed or registered to do business in the US.
What isn't considered a reporting company?
Unincorporated trusts, such as revocable and most irrevocable trusts, used in estate planning and wealth transfer strategies are not reporting companies. But, as discussed below, because these entities often own substantial interests in reporting companies, disclosure of ownership and control information about these trusts will likely be required.
The act also creates a disclosure obligation on what it defines as the "company applicant." Essentially, this is the person or persons responsible for filing the Beneficiary Ownership Information (BOI) form with FinCEN. This could be any number of individuals, from someone working at the reporting company to the attorney, accountant, or other advisor directing and advising the filing.
When must initial required disclosures be made?
The timing of initial required disclosures is staggered.
- "Reporting companies" in existence prior to January 1, 2024, must make their BOI disclosure by January 1, 2025.
- Reporting companies formed on or after January 1, 2024, but before January 1, 2025, will be required to make their BOI disclosure within 90 days of when its creation or registration is effective.
- Reporting companies formed on or after January 1, 2025, will be required to make their BOI disclosure within 30 days of the date when its creation or registration is effective.
On December 12, 2023, the "Protect Small Business and Prevent Illicit Financial Activity Act" was passed by the House of Representatives. If signed into law, this act would extend some of these reporting deadlines, most notably pushing back the initial deadline for existing LLCs (created before January 1, 2024) to January 1, 2026, rather than January 1, 2025. This bill is now in the Senate Committee on Banking, Housing, and Urban Affairs for further consideration.
What constitutes a reporting company?
A domestic "reporting company" is defined generally as:
- Any non-exempt corporation
- Any non-exempt limited liability company
- Any other non-exempt entity that was created by the filing of a document with the secretary of state or any similar office under the law of any state or Indian tribe.
Although general partnerships can be created without any formal documentation or filing, limited partnerships (LPs) and limited liability partnerships (LLPs) are generally required to file a certificate of formation with the appropriate secretary of state. As a result, they are subject to the reporting and disclosure requirements of the CTA.
Are any entities exempt from these requirements?
The act exempts 23 categories of entities, many of which are financial services and related entities and tax-exempt organizations that are already subject to significant disclosure and reporting requirements. Also exempted is what the CTA defines as a "large operating company."
The CTA uses the following criteria to determine if a company is considered a large operating company. The company must have a physical presence in the US with more than 20 full-time US employees employed in the US and have filed a US federal income tax return (or information filing) for the previous year demonstrating $5 million in gross receipts or sales (and also reported these gross receipts or sales on one of IRS Forms 1120,1120-S, or 1065), excluding receipts and sales from sources outside the US.
There are several nuances to the exemption rules and in many cases a multi-step analysis is required to determine how they apply, particularly when affiliated entities are involved. Once it's determined there is a disclosure obligation, the next step is to identify the entity's beneficial owners and determine whether they need to be disclosed to FinCEN.
How is beneficial ownership defined?
A beneficial owner is either an individual who exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the company.
The CTA requires disclosures of all individuals that exercise substantial control over the reporting company. Based on the act, a person exercises substantial control if they're a senior officer, important corporate decision maker, or have the ability to appoint or remove certain officers and/or a majority of the board of directors.
The CTA exempts 5 categories of owners that would otherwise be subject to disclosure:
- A minor child, provided information about their parent/guardian is disclosed
- An agent, custodian, nominee acting on behalf of another
- An employee
- Future inheritors
- Creditors
Notably absent from exemption are trustees and trust beneficiaries. Because trusts often own the interests of entities, such as LLCs, trustees and trust beneficiaries may be subject to disclosure requirements. In fact, the guidelines provided by FinCEN specifically consider trustees and trusts as individuals that can exercise substantial control and/or ownership over reporting companies.
Additionally, given the broad definition of "substantial control," trust protectors and trust advisors could also expect to potentially be subject to disclosure requirements as well.
What must be disclosed?
In many cases, the CTA may present first-time trusts, trustees, and beneficiaries with the need to disclose detailed information to governmental authorities. On the other hand, trusts that open brokerage and/or investment accounts likely provided much of the same, and potentially greater, detailed information to financial institutions as part of "Know Your Customer" (KYC) required disclosures.
| Reporting company | Beneficial owner/Company applicant2 |
|---|---|
| Full legal name of the entity | Full name |
| Any trade or DBA name | Date of birth |
| Address of the entity | Home address |
| The jurisdiction of formation of the entity | A unique identifying number and issuing jurisdiction (e.g., driver’s license, passport) |
| Federal taxpayer ID number | A copy of the document that contains the identifying number |
Alternatively, the reporting company can submit a FinCEN identifier (obtained by the beneficiary owner or company applicant directly from FinCEN) in lieu of the information listed above.
Reporting companies have an ongoing obligation to update their BOI information within 30 days of any changes. Beneficial owners and company applicants who have obtained a FinCEN identifier are also required to report changes to FinCEN within 30 days.
Who has access to the disclosed information?
Given the detailed and confidential information required, you may be wondering: Who can access it? FinCEN permits federal, state, local, and tribal officials, as well as certain foreign officials who submit a request through a US federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the reporting company. Those financial institutions' regulators will have access to beneficial ownership information when they supervise the financial institutions.3
What are the planning implications?
The CTA will have an impact on those who own small companies and those who employ corporate structures, such LLCs and trusts, as part of their estate plans. At a minimum, these new and ongoing reporting obligations will add administrative burdens and expense when leveraging these layered strategies, not to mention the civil and potential criminal liability for knowingly and intentionally failing to comply. While some have questioned whether the new disclosure requirements will encourage a pivot away from using these entities in estate planning, the more likely scenario is that these strategies will remain, but potentially be more costly to implement and maintain.