United States: Corporate Transparency Act Creates A Reporting Requirement For Many Family Businesses

The Corporate Transparency Act (CTA), passed to give the government more weapons to fight money laundering and terrorism financing, takes effect on the first day of 2024. Although you may think that anti-terrorism measures will not apply to you, in fact, the CTA will require many family businesses, for the first time ever, to report beneficial ownership information to the U.S. Treasury. We recommend planning accordingly now.

This new law imposes beneficial ownership reporting requirements on entities formed in the United States or registered to do business in the United States, including the beneficial owners of such entities and the individuals who formed them. Reports will be submitted to the U.S. Department of the Treasury's FinCEN, which will collect and manage such information through a secure private database.

The CTA is expected to apply to an estimated 32 million entities in the United States that, until now, have not been subject to beneficial ownership reporting requirements. Many of the entities within a family business structure — from the parent company to its subsidiaries and some types of family trusts that may have ultimate ownership of the business — will have to file. In the latter category, it is worth noting that most (if not all) family trusts used for most estate planning purposes are not reportable entities but will require analysis of the participants within the trust arrangement (i.e., settlor, grantor, trustee, protector, investment adviser, beneficiaries, etc.) to evaluate whether any of them would be considered beneficial owners for purposes of CTA reporting.

While nearly two dozen types of entities are exempt, as they likely are already regulated, such as banks and insurance companies, as well as publicly traded companies, family-owned businesses are not exempt from reporting. Entities like corporations, limited liability companies or limited partnerships that have 20 or fewer employees or revenue of less than $5 million will be expected to report under the CTA's provisions. On the other hand, companies with 20 or more employees, at least $5 million in annual revenue and that operate from an office in the U.S. are exempt from filing. Depending on the size of your family business, this particular exemption may or may not apply.

The CTA requires each reporting entity to provide the following information about itself, its beneficial owner(s), and its company applicant(s):

Reporting company

• Legal name, trade name and "DBA"
• Street address of principal place of business
• Tax ID number

Beneficial owners & company applicants

• Legal name
• Date of birth
• Address
• ID number (passport, driver's license, etc.)
• Image of document with ID

Reporting company

The CTA's applicability to small-business entities will place new reporting responsibilities on family businesses at formation and throughout the lifecycle of the business, at any point when there is a direct or indirect change in beneficial ownership. Unless an entity within your family business structure falls into an applicable exemption set forth in the rules implementing the CTA (31 CFR 1010.380(c)(2)), each legal entity formed or doing business in the U.S. will need to file under the CTA.

Beneficial owner

Once you have identified each reporting company within the family business structure, the next step is determining the beneficial ownership information for each. Subject to certain exclusions, such as minor children and contingent beneficiaries of a trust, a beneficial owner under the CTA is defined as an individual who, directly or indirectly, has substantial control or owns or controls 25% or more of the ownership interests. A person with substantial control may include someone serving as a senior officer, who has authority to appoint or remove a senior officer or majority of the board or who is directing or making substantial decisions over important matters.

Examples include senior members or officers who hold special votes or powers to designate salaries and/or hire or fire executives, or those who hold the right to make certain other managerial decisions. Family businesses often have particularly complicated control structures to manage potentially competing interests. For example, there may be special mechanisms to take account of the potentially differing interests of professional managers versus family owners, or the potentially differing interests of family members who are active in the business versus those who aren't.

For purposes of determining a 25% ownership interest, you must take into account direct and indirect interests, contingent ownership like options and warrants and joint ownership of undivided interests. For corporations, entities taxed as corporations and other entities that issue shares, an individual's percentage of ownership interests is the greater of: (1) the total combined voting power of all classes of ownership interests of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote, or (2) the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interests.

Company applicant

Company applicant information must be provided for entities formed after Jan. 1, 2024. A company applicant is an individual who files the formation or registration documents on behalf of a reporting company. This includes both the person at the company who actually files the documents and the person who directs the filing. For example, this can include an employee of a law firm, an assistant, an agent or a family member filing the documents necessary to form the entities that are part of your family business.

Filing due dates

Each reporting company formed or registered to do business in the U.S. after Jan. 1, 2024 has only 30 calendar days after receiving notice of its creation or registration to file its initial report. Those formed before that date are required to report by Jan. 1, 2025. After the initial report is filed, any changes or corrections must be reported within 30 calendar days of such change. If there are no changes to the information provided, there is no other ongoing filing requirement. As such, if you plan to add entities to your family business structure in 2024, you will have a tight deadline to file under the CTA.

Penalties

The penalties for failing to file include civil fines of $500 for each day the report is past due or is inaccurate. Criminal penalties include fines of up to a cap of $10,000, and imprisonment for up to two years.

Next steps

To prepare for compliance with the CTA, we recommend you take inventory of all the entities that are part of your family business structure and confirm whether each will be subject to reporting under the CTA, which may necessitate the involvement of legal counsel or other professional advisers. You should also identify the individuals who will be deemed beneficial owners and company applicants (if applicable) of each entity that will be subject to reporting under the CTA and begin collecting the required information about them. Because of the often complicated control mechanisms in family businesses, it is important to understand who may be deemed to have substantial control.

Furthermore, if there are multiple entities within your family business structure that will be subject to reporting under the CTA, consider restructuring options to simplify reporting obligations, if they are available. For example, consider consolidating entities or dissolving dormant entities.

In addition, if you are concerned about either data privacy or administrative burdens with respect to CTA reporting, the CTA permits a reporting company or a beneficial owner to use a FinCEN identifier, or unique identifying number assigned by FinCEN to a company or beneficial owner, instead of providing the entire set of required data each time a CTA report must be filed. For individuals, FinCEN will issue a FinCEN identifier independent of a reporting company filing if the individual submits to FinCEN the same identifying information that would be required in a CTA reporting company filing. For reporting companies, FinCEN will issue a FinCEN identifier only at or after the time the reporting company files an initial report. Once an individual or entity obtains a FinCEN identifier, you are able to provide the FinCEN identifier in reporting company filings rather than providing the detailed information about such individual or entity otherwise required. If your family business struggles to meet filing deadlines or is overwhelmed with administrative tasks, a FinCEN identifier may be useful to you.

We want to reiterate that we expect the CTA to have a major impact on family businesses, with its applicability to small businesses with fewer than 20 employees and less than $5 million in revenue. Filing in a timely manner will require review of each company within your family business structure, the management and administrative structure of each and collection of specific information in each of these categories. Given the penalties associated with non-compliance we recommend working with your legal counsel or other professional advisers, as applicable, to ensure reporting is correct and accurate.

Bill Kambas, partner and regional division leader of Withers' U.S. private client and tax team, contributed to this report.

Originally published by Corporate Compliance Insights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.