The Corporate Transparency Act (CTA), a component of the National Defense Authorization Act for Fiscal Year 2021, was enacted on January 1, 2021, and becomes effective on January 1, 2024. The CTA aims to promote transparency in the corporate sector and to combat illicit activities.
Under the CTA, specific business entities, known as reporting companies, are mandated to adhere to key requirements. These include:
- Disclosing essential Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN)
- Revealing information about the individuals responsible for creating or registering them in the United States
- Promptly reporting any changes to previously submitted information.
The disclosed BOI is securely maintained in a nonpublic database by FinCEN, assisting law enforcement efforts against money laundering, tax fraud, terrorist financing, and anonymous shell and front companies.
But how could the CTA impact you and your business?
In this article, we will explore the entities subject to CTA jurisdiction, delve into the specifics of the required information, and explain what this means for real estate investors and operators.
Who Must Report?
The CTA imposes reporting obligations on specific categories of entities known as "reporting companies," both domestic and foreign, with certain exemptions in place. Domestic reporting companies encompass corporations, LLCs, and similar entities formed through filings with secretary of state offices, or other state agencies.
While the CTA and its Final Reporting Rule do not provide an exhaustive list, they suggest that entities like limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships are likely reporting companies due to their typical establishment through state filings. Sole proprietorships, specific trust types, and general partnerships not created via the secretary of state filings are generally excluded from this definition. Foreign reporting companies include non-U.S. entities, established under foreign laws, that must register to conduct business within U.S. state or tribal jurisdictions by filing documentation with a secretary of state or equivalent office.
Importantly, unlike certain federal securities laws, the CTA places the responsibility for filing Beneficial Ownership Information (BOI) reports and updates on the reporting company itself, marking a significant shift in reporting dynamics.
Exempt Entities
While LLCs, corporations, limited partnerships, and other entities filed with a secretary of state generally must report, there are a range of exemptions to accommodate various entities and prevent redundant reporting obligations. The CTA recognizes that certain entities already undergo robust regulatory oversight, and therefore, they are exempted from the CTA's reporting requirements.
Among the exempted categories are large operating companies, which, by employing over 20 full-time U.S. employees, maintaining a physical office in the country, and reporting annual gross receipts exceeding $5 million, demonstrate their adherence to rigorous reporting standards. Public companies, already subject to stringent securities regulations, also find exemption under the CTA.
Moreover, the CTA acknowledges the uniqueness of certain entities, including investment firms, venture capital fund advisers, pooled investment vehicles, insurance companies, and public accounting firms, by exempting them from additional reporting. Highly regulated institutions such as banks, credit unions, securities brokers, and others also benefit from exemptions.
Additionally, tax-exempt entities, those supporting them, governmental authorities, and subsidiaries of exempt entities are among those granted exceptions. These exemptions are designed to streamline reporting and focus efforts on entities not already subject to stringent regulatory oversight, ensuring that the CTA's goals of transparency and accountability are effectively achieved.
Beneficial Owners
The CTA mandates that reporting companies must identify specific individuals in their Beneficial Ownership Information (BOI) report. These individuals include beneficial owners and company applicants for reporting companies created or converted into foreign reporting companies after the CTA's Effective Date. The term "beneficial owner" encompasses individuals who either exercise substantial control over the reporting company or own or control 25% or more of its ownership interests.
"Substantial control" under the CTA is distinct from control under other federal statutes, such as securities laws. An individual is deemed to exercise substantial control if they serve as a senior officer of the reporting company, have authority over senior officer appointments, or a majority of the board of directors, or influence important decisions, including those related to business operations, asset transactions, equity issuance, debt, contracts, and governance documents. The CTA provides a non-exhaustive list of examples where an individual may exercise substantial control.
Ownership interests are defined broadly under the CTA and encompass various instruments, including equity, certificates, interests in joint ventures, convertible instruments, and more. An individual may own or control an ownership interest through various means, such as trusts, beneficiaries, grantors, or intermediaries. The CTA aims to ensure that reporting companies identify all individuals with substantial control and those who own or control at least 25% of ownership interests in their BOI reports.
Beneficial Owner Exemptions
The CTA explicitly excludes five categories of individuals from the definition of beneficial owner:
- Minors, defined according to state or tribal law under which the reporting company was established or registered, are exempt, with the reporting company required to provide the personal information of a parent or legal guardian instead.
- Nominees, intermediaries, custodians, or agents acting on behalf of others are also excluded, though the reporting company must still report the personal information of the individual they represent.
- Certain employees of reporting companies, excluding senior officers, are exempt if their control over or economic benefits from the company solely derive from their employment status.
- Heirs with future interests through inheritance.
- Specific creditors who hold rights related to debt repayment, designed to secure or enhance the likelihood of payment, are also not considered beneficial owners under the CTA.
It is important to note that these exemptions are not absolute and some of them may cease to apply under certain circumstances.
Required Information About Beneficial Owners
The required information includes the full legal name, date of birth, complete current address (unless the company applicant forms or registers entities in the course of their business), and a unique identifying number from certain government-issued documents like a U.S. passport, state or tribal identification, or driver's license, along with an image of the identification document.
However, if one or more exempt entities have an ownership interest in the reporting company, and an individual is a beneficial owner solely due to their ownership in these exempt entities, the reporting company can choose to list the exempt entity names rather than providing individual beneficiary information, with the caveat that this flexibility doesn't apply when the beneficial owner holds interests in both exempt and non-exempt entities or exercises substantial control over the reporting company.
So, What Does This Mean For Real Estate Investors and Operators?
Many investors and operators in the real estate industry conduct at least some form of their business through limited liability companies and limited partnerships. Under the CTA, an LLC and an LP would both likely be considered reporting companies. That means that if you own any LLC entities or Limited Partnership entities, those entities will fall under the CTA unless they also meet exemptions. Thus, as a real estate investor/operator, it is likely that some or all of your businesses will need to make the proper filings and ensure compliance with the CTA.
If your current projects involve entities created before January 1, 2024, that meet the reporting company requirements, you will have until January 1, 2025, to ensure that the proper filings and disclosures have been made. For entities created after January 1, 2024, you will need to promptly comply with the CTA and file the appropriate documents within 30–90 days of the entity’s creation.
As a real estate investor/operator:
- Know which of your entities are considered reporting companies under the CTA.
- Understand who all of the beneficial owners are and the disclosure information required.
- Timely file your required disclosures with the Financial Crimes Enforcement Network.
Anonymity Is Not Dead
In conclusion, the CTA represents a significant shift towards transparency and accountability in the corporate world. With its implementation set for January 1, 2024, reporting companies, both domestic and foreign, will play a crucial role in disclosing Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN).
While certain entities enjoy exemptions based on their size, regulatory status, or unique characteristics, the CTA's primary objective is to ensure that individuals with substantial control or significant ownership interests are identified and reported. This comprehensive legislation seeks to combat money laundering, tax fraud, terrorist financing, and the use of anonymous entities for illicit activities, ultimately bolstering law enforcement efforts and promoting a more transparent corporate landscape.
While one may find themselves in a position that requires them to report BOI to FinCEN, the information will be stored in a secure, non-public, government database. With that, the government may know who the beneficial owners of an entity are even if the entity is filed in a state that typically allows for anonymity; however, the general public will still be none the wiser.
About the Author:
Nic McGrue is a tenured professor of law and the founder of Polymath Legal PC. At Polymath Legal PC, Nic helps real estate investors lawfully raise capital allowing them to generate passive income while creating generational wealth.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
