The New Federal Law on Corporate Transparency – What Business Owners and Their Advisors Need to Know Now
Updated January 2022
Approved by Congress in January 2021, the Corporate Transparency Act (CTA) is a new federal law requiring many business entities to identify to the Treasury Department the individuals who own a 25 percent or greater interest in the entity or who otherwise exercise substantial control over the entity. The CTA seeks to identify entities used for money laundering and other criminal activities by requiring entities to disclose their ownership and control.
While regulations on how the CTA will be enforced have not yet been finalized by the Treasury, there are several things businesses owners and their advisors should know now.
Key takeaways from the CTA include:
- No Public Disclosure. The information reported to Treasury will not be made publicly available but will be used on a confidential basis for law enforcement and national security purposes. So for business entities formed in North Carolina, Delaware, and most other states, information about the entity owners will continue not to be available to the public.
- Individuals to be Identified. While the CTA refers to individuals who own a 25 percent or greater interest or who exercise substantial control over an entity as “beneficial owners,” it is important to note that this is not limited to individuals who actually own interests in the entity. The CTA refers to “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise.” For example, this will include an individual owning an interest in another entity that owns an interest in the reporting entity. The proposed regulations broadly define “substantial control” to include service as a “senior officer,” the ability to appoint or remove a senior officer or a majority or “dominant minority” of a board or directors or similar body, or “substantial influence” over “important matters affecting” the entity, including but not limited to the matters listed in the proposed regulations.
- Information Required. An entity is required to identify individuals by full legal name, street address, date of birth and the number on an individual’s passport, driver’s license or other government issued ID.
- Entities do the Reporting. The business entity, and not an individual who is required to be identified as a “beneficial owner,” must file the reports with Treasury. Subject to the exemptions noted below, corporations, limited liability companies, and other types of entities that are created by a filing with a state or that are created under foreign law and doing business in the United States are “reporting companies.”
- Identifying Number Alternative. An individual may obtain from Treasury an identifying number for use in lieu of the personal information outlined above. Similarly, a business entity that has provided Treasury with the required information regarding its ownership may also obtain an identifying number. An entity may provide its identifying number to a reporting company in which the entity owns an interest in lieu of providing information about its ownership to the reporting company. The reporting company then provides Treasury the number of the entity instead of identifying the individuals who own interest in it. This will allow an entity to avoid disclosing information about its ownership to another reporting company.
- Reporting Updates. A reporting company is required to report any change in the information earlier reported. While the CTA requires the updating to occur no later than one year after the change occurs, the proposed regulations require the update to be submitted within 30 days.
- Obtaining the Information to be Reported. The CTA itself does not impose on a reporting company’s owners an obligation to provide the reporting company the information required for the reporting company’s compliance with the CTA. Unless this obligation is addressed in the final regulations, a reporting company should consider imposing this obligation in its organizational agreements.
- Existing Entities. Unless exempt (see below), entities that are formed before the regulations take effect will be required to file their first report with the Treasury at the time provided in the new regulations. While the CTA requires this to be not later than two years after the regulations’ effective date, the proposed regulations shorten this to just one year after the effective date.
- New Entities. Unless exempt, entities formed after the regulations’ effective date will be required to file their first report at the time of formation. The proposed regulations require the first report within 14 days after formation.
- Identification of Persons Forming Entities. In addition to identifying individuals who are “beneficial owners”, a reporting company will be required to identify an individual who “files” the document to create the entity.
- Many types of business entities are exempt from the CTA, including public companies, various types of entities for which there is already substantial regulatory reporting, certain tax-exempt entities, general partnerships, and certain existing dormant entities. Of broadest potential impact is an exemption for an entity that has at least 20 full-time employees, more than $5 million in annual revenues, and an office in the U.S.
- The CTA imposes substantial criminal and civil penalties for “willfully” failing to report information or providing false information.
Businesses subject to the CTA will face significant new reporting and related record-keeping obligations. However, it is important to note that the CTA requires reporting information that in most cases is already being provided the Treasury through federal income tax returns. And like income tax return information, the information reported will not be publicly available.
 On December 8, 2021, Treasury promulgated its proposed regulations asking for public comment on or before February 7, 2022.
 The preamble to the legislation cites the use of business entities by “malign actors” to conceal their involvement in “illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption[.]” The proposed regulations confirm that the information will not be publicly available.
 Like many other states, North Carolina requires business entities to publicly disclose the names of the persons who manage the entity but not the names of the owners.
 See proposed regulation 31 CFR § 1010.380(d)(1).
See proposed regulation 31 CFR § 1010.380(b)(1)(ii). The proposed regulations require that a photocopy of the identifying document containing the number with a photograph of the individual must be submitted. Id.
 The CTA refers to a “similar entity that is created by the filing of a document with a secretary of state or a similar office . . .” The proposed regulations define two terms: “domestic reporting company” (which are corporations, limited liability companies, and other entities “created by filing a document with a secretary of state or any similar office under the law of a State or Indian tribe”) and “foreign reporting company” (which are corporations, limited liability companies, or other entities that are “[f]ormed under the law of a foreign country” and are “[r]egistered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe”); see proposed regulation 31 CFR § 1010.380(c)(1).
 The proposed regulations require a company to file an updated report within thirty calendar days “after the date on which there is any change with respect to any information previously submitted to FinCEN . . . including any change with respect to who is a beneficial owner . . . and any change with respect to information reported for any particular beneficial owner or applicant.” Proposed regulation 31 CFR § 1010.380(a)(2). See the discussion later in the text of this article regarding “applicant.”
 The CTA prohibits an entity from issuing interests in “bearer form” that can be transferred without registering the identity of the new owner.
 As noted later in the text of this article, the CTA imposes civil and criminal penalties for “willful” failure to provide the required information. It is not yet clear how this standard will be applied if a reporting entity cannot provide the required information about an individual because the individual – or an entity through which the individual owns an indirect interest in the reporting entity – refuses to provide the information. Imposing a contractual obligation on the entity’s owners to provide the required information may help avoid a penalty in this circumstance.
 See proposed regulation 31 CFR § 1010.380(a)(1)(iii).
 See proposed regulation 31 CFR § 1010.380(a)(1)(i).
 The CTA refers to this individual as the “applicant,” which the proposed regulations redefine as “company applicant” to include “any 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[.]” See proposed regulation 31 CFR § 1010.380(e). The preamble to the proposed regulations indicates that this would include not only the individual at the law firm or service filing company that actually submits the document for filing with the state but also the individual who requests that individual to make the filing. Presumably this would include the person signing the document such as the “incorporator” in the case of a corporation. What about the lawyer requesting the filing? The individual(s) who are the lawyer’s client(s)? While not clear, all of these individuals may fall within the definition of company applicant.
The notice of proposed regulations requires that if a company initially not eligible for an exemption later becomes eligible, the company must report this within 30 days. See proposed regulation 31 CFR § 1010.380(a)(2)(i).
 As noted earlier in the text of this article, the reporting requirements generally only apply to entities that are created by a filing with a state or that are created under foreign law. Under North Carolina law, creation of a general partnership does not require a filing and so North Carolina general partnerships appear to be exempt from the CTA. It is not clear whether this exemption from the CTA would include a North Carolina registered limited liability partnership, which provides liability protection of the partners; this status requires a filing with the state. The preamble to the proposed regulations suggests that limited liability partnerships will not be exempt.
 The proposed regulations limit the dormant entity exemption to entities that were in existence prior to January 2, 2020. See proposed regulation 31 CFR § 1010.380(c)(2)(xxiii).
 See proposed regulation 31 CFR § 1010.380(c)(2)(xxi). The proposed regulations also provide an exemption for a subsidiary of such an entity. See proposed regulation 31 CFR § 1010.380(c)(2)(xxii).