Mandatory Business Owner Reporting

The federal government has passed some new legislation that will require small businesses to report personal information about the business’s owners to a database controlled by the Securities Exchange Commission.  The legislation is called the Corporate Transparency Act (the “Act”), adopted as Title LXIV (64) of the 2021 National Defense Authorization Act.  The purpose of the Act is to help the Treasury Department prevent money laundering, tax fraud, financing of terrorism activities and other “malign actors” from using shell companies to conduct their activities.

Although the Act requires businesses to register ownership information to Financial Crimes Enforcement Network (FinCEN), many entities are exempt from doing so.  Mostly those entities are in banking, securities, insurance, are public traded companies or have more than 20 employees and more than $5 million in operating revenue.  The Act has some terms that are not clearly defined, but which will hopefully be clarified by Treasury Department regulations in the future.  For example, “beneficial owners” are individuals who, directly or indirectly, (i) exercise substantial control over an entity or (ii) own 25% or more of an entity.  How does the ownership of a 5-person cooperative fit into that definition?  Corporations, limited liability companies and “other similar entities” is another phrase that will need clarification.

The Corporate Transparency Act and Secretary of State Filing Offices and The Corporate Transparency Act Imposes New Ownership Reporting Obligations on Business Entities from Wolters Kluwer (CT Corporation) provide details about the who, what, where, and when of the Act.  No formal regulations have yet been created, and the Treasury Department has until January of next year to draft initial regulations.  So immediate action by small business owners is not yet necessary, but it’s a good idea to keep your eyes open for further information and clarification.

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