Small Business Ownership Disclosure

Under a new U.S. law that took effect January 1, 2021, new small closely held business entities that aren't otherwise regulated businesses (basically corporations and LLCs) once regulations are enacted but no later than January 1, 2022, and by January 1, 2023, existing small, closely held business entities that aren't otherwise regulated businesses, must file an annual federal disclosure of their beneficial owners and if a regulation requires it, after certain changes in ownership. 

As of November 3, 2021, however, according to the Financial Times, however, the regulatory process was stalled:

A new law that will stop US businesses using shell companies to hide from tax authorities has run into delays at the Treasury department, senior Congressional Democrats have warned, with a key legal deadline set to be missed. Congress passed the Corporate Transparency Act in January with the intention of forcing businesses to declare for the first time who their true owners are — a key weapon for US tax officials. The bill came after more than a decade of political wrangling, and was meant to come into force by January 1 2022. 

On Wednesday, however, the three Democratic committee chairs who shepherded the bill through Congress wrote to Janet Yellen, the US Treasury secretary, expressing disappointment at the slow pace of implementation. The letter, which has been seen by the Financial Times, was signed by Sherrod Brown, chair of the Senate banking committee, Maxine Waters, chair of the House of Representatives financial services committee, and Carolyn Maloney, chair of the House oversight committee. In it, the three Democrats warn: “We are disappointed by delays on this important rule, but recognise that . . . a final rule is now not likely to be issued by the implementation deadline.” 

They urged Yellen to move faster with the rulemaking process. “We hope that as the department’s leader, you will do everything that you can to ensure swift action on the rule, including urgently providing additional staff and resources as necessary to achieve the effective and timely issuance of a proposed and subsequent final rule,” they said. . . .

It is deliberately broad in its scope, covering corporations, LLCs and any other state-registered or foreign-registered business that transacts in the US. Anti-tax avoidance campaigners have previously called the move “the biggest anti-money-laundering update that we’ve had in 20 years”. . . .  

The legislation required the Treasury to create the new rule, setting out more detail on which companies would be covered and how it would be monitored and enforced. But the department only published a request for public comment in April, and is still going through hundreds of responses to that, many of which come from organisations that opposed the law in the first place. The bill’s backers say it would have been quicker to publish a proposed rule before requesting comment. 

Other hurdles have been the chaotic transition between the Trump and Biden administrations, and the fact that Congress has not yet passed a measure increasing the Treasury’s budget to enforce it. 

A Treasury spokesperson defended the process, saying: “The insights and views of stakeholders — including federal agencies, states, tribes and the private sector — provided in response to [a request to comment] are invaluable to the rulemaking process, and help inform both the [proposed rule] and the final rule.” The person added: “FinCEN has a substantial and proactive agenda, and one of our highest priorities is the implementation of the beneficial ownership requirements of the Corporate Transparency Act.”

All nonexempt entities, or “reporting companies,” must submit beneficial ownership information to FinCEN, which will hold that information in a secure, nonpublic database once forms are drawn up and regulations are in place.

The full text of the law is available here.

Who Is a “Beneficial Owner” for the Corporate Transparency Act?

Under the Act, each of the following is a “beneficial owner:”

* A natural person

* Who directly or indirectly (through any contract, arrangement, understanding, relationship, or otherwise)

* Exercises substantial control over the entity, owns 25% or more of the equity, or receives “substantial economic benefits” from the assets of the entity 

What Information Is Required for Each “Beneficial Owner?”

* Full legal name

* Date of birth

* Current residential or business address

* The unique identifying number from a valid U.S. passport, personal identification card, state driver’s license, or if none of those are available, a valid foreign passport (subject to some fussy detailed requirements).

What Are the Consequences of a Failure to Comply?

Failure to comply with the new CTA reporting requirements will result in serious penalties. An individual who fails to meet the reporting standards may face civil penalties of up to $500 per day. An individual who willfully provides or attempts to provide false or fraudulent information, or willfully fails to provide FinCEN with the requisite information, may face criminal fines up to $10,000 and/or imprisonment for up to two years.

Moreover, the statute imposes penalties for individuals who engage in unauthorized use or disclosure of beneficial ownership information collected under the CTA. The civil penalty is up to $500 per day, and the criminal penalty includes fines up to $250,000 and imprisonment for up to five years.

The Act does provide that civil or criminal penalties shall not apply in the case of negligent non-compliance, although it remains to be seen how “negligence” will be interpreted. 

Who Is Exempt? 

Not a “beneficial owner”

* A minor child

* A nominee, custodian, or agent

* An employee “whose control over or economic benefits” from the entity “derives solely from” employment status

* A person whose interest is through inheritance

* A creditor (unless that gives the creditor control)

Excluded entities

* An entity whose securities are registered with the SEC
* An entity chartered under an interstate compact
* An FDIC depository institution
* A credit union
* A bank holding company
* An SEC-registered broker/dealer
* A securities exchange or clearing agency
* An investment company or an investment advisor registered under the 1940 Acts or described in one of the Acts
* An insurance company
* An entity registered with the Commodity Futures Trading Commission (“CFTC”)
* A public accounting firm registered with the Public Company Accounting Oversight Board (“PCAOB”)
* A financial market utility designated by the Financial Stability Oversight Council (“FSOC”)
* An insurance producer
* Certain pooled investment vehicles
* A public utility
* A church, charity, or non-profit with tax-exempt status

* A business concern with 20 or more full-time employees in the U.S.; $5 million in gross receipts or sales as shown on U.S. tax filings; and an operating physical presence at an office in the U.S. 

* Dormant companies which have been in existence for more than one year, are not engaged in “active business,” AND not owned (either directly or indirectly) by a non-U.S. individual

* Any corporation or LLC formed and owned by an excluded entity

FinCEN has express authority to remove types of entities from the excluded list or to add new exclusions. In relation to that authority, FinCEN is charged with continuing to study “beneficial owner” issues.