By Heidi Gassman
MOYE WHITE LLP
On Jan. 1, 2022, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury will require all entities registered to do business in the U.S. to submit a report identifying the company’s applicants and beneficial owners or face penalties.
Background
Forming a corporate entity in Colorado is easy and can be done entirely online. It is also inexpensive (just an initial $50 filing fee, with $10 annual renewals) and requires almost no disclosures. A person forming a corporation or a limited liability company under Colorado law does not need to identify the shareholders, directors, officers, members or managers. In fact, not much information is required beyond the name of the person forming the entity, an address for the entity and the name and address of a registered agent for the entity.
These minimal requirements make it easy for a person or persons to form an entity completely anonymously and use it for various purposes without ever having to disclose their personal involvement with it. Most people don’t abuse this opportunity. However, some bad actors do use these entities to commit serious crimes, including drug and human trafficking, money laundering, tax evasion, and financial fraud. For this reason, the federal government enacted the Corporate Transparency Act on Jan. 1, 2021, which goes into effect in January 2022. The CTA is intended to collect information on the beneficial ownership — the identities of the individuals who own or control the entity — of corporations, limited liability companies, and other similar entities formed in the U.S., in an effort to eliminate crimes committed using anonymous entities.
Requirements
The CTA will require certain companies to submit a report to FinCEN. The report must identify the company’s applicants and beneficial owners. Any U.S. domestic entity, or any foreign entity registered to do business in the U.S., is required to make these reports; however, there are a few exceptions. These include:
- Publicly traded companies
- Nonprofit entities
- Entities already required to make reports (for example, banks, insurance companies and financial advisors)
- Companies considered to be dormant and which do not own any assets
- Companies physically located in the U.S. THAT have more than 20 full-time employees and more than $5 million in annual gross receipts
An “applicant” is a person who files an application to form an entity, or who files an application to register a foreign entity to do business in the U.S. A “beneficial owner” is any individual who has substantial direct or indirect control over an entity, or who owns or controls at least 25% of the ownership interests of an entity. For each beneficial owner, a company must report that person’s full legal name, date of birth, current address and identification number (for example, a number from a non-expired government identification document, such as a passport or driver’s license). In addition, companies must update their reports with any changes to reported information within 12 months of the change.
All new entities formed after Jan. 1, 2022, which are subject to the CTA’s requirements, are required to report their information when their entity is formed. Entities formed before Jan. 1, 2022, must report by Jan. 1, 2024. Civil and criminal penalties will apply to those who do not report. The information collected by FinCEN will remain confidential and is intended to be available only to federal government agencies, state and local law enforcement, international law enforcement agencies and certain financial institutions. Reports filed by entities will not be available under the Freedom of Information Act or similar laws.
There is no guidance yet on how reports will be filed, or with what governmental agency. However, it is clear that many people who have previously enjoyed a great deal of privacy, including small-business owners and individual real estate investors, will need to make reports under the CTA. If you are an owner of a business, you should be ready to determine whether you must report under the CTA, collect the required information and make the report if necessary, and have a compliance plan in place for any changes in the ownership or control of your entity.
– Heidi Gassman, co-chair of Moye White’s business section, focuses her practice on estate planning. She advises clients on a wide variety of estate planning matters, including estate and trust administration and pre and post-marital agreements.