By: Andrew Bechel, Esq.
The Corporate Transparency Act, which was part of the recent National Defense Authorization Act that Congress passed over President Trump’s veto, went into effect on January 1, 2021, and essentially bans anonymous shell companies in the United States. Historically, it has been extremely easy to set up a corporation or limited liability company in the United States without disclosing any significant information about the beneficial owners of that entity. While many individuals, particularly high profile individuals, have utilized entities to address valid privacy concerns, this lack of transparency also meant that many US entities have been used in connection with criminal activity, such as drug trafficking, human trafficking, gun smuggling, tax evasion, etc. As a result, the Corporate Transparency Act requires that beneficial ownership information be disclosed to FinCEN when a new entity is formed or when a change in ownership occurs
Although the Corporate Transparency Act became law on January 1, 2021, there will not be any enhanced reporting requirements until the implementing regulations have been finalized, which must be by December 31, 2021, pursuant to the Act. Until such regulations are finalized, it is not entirely clear what the overall scope of the disclosure requirements will be or which entities will ultimately need to make such disclosures. That being said, it is clear that the disclosure requirements will apply to many entities that clients have set-up for estate planning and asset protection purposes. These requirements will not invalidate any of these entities or invalidate these planning techniques, but there will likely be additional filing requirements that will need to occur when an entity is formed or ownership changes.
What is the Corporate Transparency Act?
The Corporate Transparency Act requires corporations, limited liability companies, and other similar entities to disclose their beneficial owners (including their identities, addresses, dates of birth, copies of government issued identification, etc.) to FinCEN. Beneficial owners, under the statute, include individuals that directly or indirectly exercise substantial control over an entity and individuals that directly or indirectly own twenty-five percent or more of an entity. Regulations will detail exactly how control and ownership is determined, particularly for entities that may be held through estate planning structures (such as trusts), but it is already clear that many entities formed for estate planning and asset protection purposes will need to disclose significant ownership information to FinCEN. However, this information will not be publicly available as it is meant to be used for law enforcement purposes, meaning that these entities can still be used to address privacy concerns.
Currently, the Act applies explicitly to corporations and limited liability companies that are formed in the United States and similar foreign entities that are authorized to do business in the United States. Thus, for example, a Delaware limited liability company would need to disclose ownership information to FinCEN if an exception does not otherwise apply even if Delaware does not require the disclosure of such information. Regulations will describe how these disclosure requirements will apply to other entities, such as partnerships and possibly even trusts. There are, however, several enumerated exceptions to the disclosure requirements, particularly for public businesses, businesses that are already subject to significant regulatory oversight (such as financial institutions), and larger businesses that have over twenty employees and report at least five million dollars in annual gross receipts. Additionally, the new disclosure requirements will be immediately applicable to entities formed after the implementing regulations are finalized, but there will be a transition period for entities that are formed before such date.
Do I Need to do Anything?
The most important thing to keep in mind at the moment is that there is not anything to do yet with regards to ownership disclosure. It is the right time, however, to begin determining which entities may be affected by the new disclosure rules, but until the implementing regulations are issued, there are too many outstanding issues that need to be addressed before we can even determine the full impact of these new disclosure requirements, much less begin to put together any disclosure documentation. That being said, any clients that are thinking about forming new entities this year should be aware that these requirements are forthcoming and, if they are concerned about the potential disclosures to FinCEN, can look into potential structures that, at least based on the statute, will be exempt from these requirements.
It is also extremely important to keep in mind that there is nothing in these new disclosure requirements that will invalidate the planning techniques that clients have been implementing for years. This is especially true since the information will not be publicly available, at least based on the statutes passed so far, to creditors, business competitors, or generally curious members of the public. Rather, there may be additional compliance and/or administrative work that will need to occur when these types of structures are initially put into place (or additional filings that may be necessary for structures that are already in place), but these requirements will not likely be different than those that many financial institutions already impose when trying to open company accounts
Now is the time to start discussing these new disclosure requirements with clients so that they are ready to disclose the necessary information to FinCEN as quickly as practical after the implementing regulations have been issued. Unlike other recent law changes, such as the recently implemented centralized partnership audit regime, there could be significant penalties for clients that do not fully comply with these required disclosures. Thus, everyone should be put on notice now that these requirements are coming to ensure that all disclosures are made in a timely manner. We will provide an update once the implementing regulations have been issued.