Family offices routinely create, manage, and invest in multiple entities, including corporations, limited liability companies, and partnerships. For entities formed or operating in the United States, there has never been a comprehensive national requirement to disclose ultimate beneficial ownership. Courtesy of the Corporate Transparency Act (CTA), that is about to change.

The CTA became law on January 1, 2021, and requires many newly formed and existing entities organized under state law, as well as entities formed under non-US law that register to do business in the United States, to identify their beneficial owners and provide certain other information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury.

On September 29, 2022, FinCEN issued final rules governing the key registration requirements under the CTA. The important terms and rules are summarized below. Throughout, the vital CTA-related date to remember is January 1, 2024. Entities formed before that date have until January 1, 2025, to register if registration is required. Entities formed on or after January 1, 2024, have 30 days to register with FinCEN.

Reporting Companies

The cornerstone of the CTA is the concept of a “reporting company,” which can be domestic or foreign. A domestic reporting company is a corporation, limited liability company, or other entity that is created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. A foreign reporting company is an entity that is formed under the law of a foreign country that has registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar agency.

Note, however, that there are quite a few exclusions from the definition of a “reporting company.” Most of these exclusions apply to categories of entities that tend to be subject to existing regulatory regimes. Some examples of excluded entities that may be relevant to family offices are:

1. registered brokers and dealers in securities;
2. registered investment companies and advisors;
3. venture capital fund advisors;
4. certain registered public accounting firms;
5. pooled investment vehicles operated or advised by banks, credit unions, registered brokers and dealers, registered investment companies and advisors, and venture capital fund advisors;
6. certain tax-exempt organizations;
7. certain charitable trusts and split-interest trusts;
8. large operating companies with more than 20 full-time employees in the United States, an operating presence at a physical US office, and more than $5 million in gross receipts or sales;
9. subsidiaries of certain exempt entities; and
10. certain inactive entities in existence on or before January 1, 2020.

This is not an exhaustive list.

Additionally, certain entities, such as trusts, sole proprietorships, or general partnerships, typically are formed or created without filing documents with a governmental entity. They generally will not be reporting companies and therefore will not be subject to the disclosure and filing requirements under the CTA.

Beneficial Owners

The CTA requires reporting companies to disclose “beneficial owners” of the entity. A beneficial owner for this purpose is “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company.”

There are certain notable exceptions. Specifically, a beneficial owner is not (1) an individual acting solely as an employee of an entity whose control over or economic benefits from such entity are derived solely from that person’s employment status, (2) an individual whose only interest in an entity is through a right of inheritance (until such inheritance occurs), (3) a minor child (if the information of the parent or guardian of the minor child is reported), (4) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another, or (5) a creditor of the reporting company.

Substantial Control

An individual exercises substantial control over a reporting company if that person (A) serves as a senior officer of the reporting company, (B) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), (C) directs, determines, or has substantial influence over important decisions made by the reporting company, or (D) has any other form of substantial control over the reporting company. An individual, including a trustee, can indirectly “exercise substantial control over a reporting company,” but the current regulations provide only limited guidance in this area.

25% Ownership Interest

The CTA rules focus on the types of arrangements conveying ownership interests, such as equity, voting trusts, capital or profit interests, convertible interests, options, and any “other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership”.

A reporting company is required to disclose individuals who own or control at least 25% of the company’s ownership interests. The individual’s ownership in a reporting company is determined by considering an individual’s total ownership interests relative to the outstanding ownership interests in the company.

In making this calculation, an individual’s options are treated as exercised, and both capital and profits interests are taken into account. With respect to corporations (and entities treated as corporations for US federal income tax purposes), an individual’s ownership of 25% or more of the combined voting power or combined value of the corporation’s outstanding ownership interests will result in classification as a 25% owner. Where the capital structure of an entity may make this calculation too difficult, an individual who owns or controls 25% or more of any class or type of ownership interest will be deemed a 25% owner of a reporting company.

Trusts as Beneficial Owners

Individuals who own or control an ownership interest in the reporting company specifically include (A) a trustee of a trust and those individuals who have the authority to dispose of trust assets; (B) a beneficiary who (i) is the sole permissible beneficiary of trust income and principal or (ii) has the right to demand a distribution or withdraw all of the assets of the trust; or (C) the grantor or settlor who retains the right to revoke a trust or withdraw the trust’s assets. As a result, if a trust owns an interest in a reporting company, it may be necessary to disclose the trustee, the beneficiary, the grantor, or some combination of the foregoing depending on the terms of the trust.

Company Applicants

The reporting company is also required to report its “company applicant.” A company applicant is defined as (1) for a domestic reporting company, the individual who directly files the document that creates the domestic reporting company; (2) for a foreign reporting company, the individual who directly files the document that first registers the foreign reporting company; and (3) for both domestic and foreign reporting companies, the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.

These individuals will differ based on how the reporting company is created. For example, in a law firm setting, the “company applicant” may include both the attorney primarily responsible for overseeing the filing of incorporation documents and the paralegal who directly files the documents. The preamble to the final CTA regulations clarified that the definition of “company applicant” is limited to only one or two individuals.

The requirement to disclose the company applicant applies only to reporting companies formed on or after January 1, 2024.

Disclosure Requirements

Each reporting company must disclose in its initial report: (1) its full legal name; (2) its trade name or d.b.a. name; (3) its current address (including the street address of its principal place of business); (4) its jurisdiction of formation; and (5) its IRS taxpayer identification number (which generally would be its EIN).

Also required is the disclosure of information on beneficial owners and company applicants. For each beneficial owner and company applicant, the reporting company must disclose: (1) the full legal name of the individual; (2) the individual’s date of birth; (3) the individual’s residential street address (or, for a company applicant, the applicant’s business address); (4) a unique identifying number and the issuing jurisdiction from: (a) a non-expired passport issued by the US government; (b) a non-expired identification document issued to the individual by a state, local government, or Indian tribe to identify the individual; (c) a non-expired driver’s license issued to the individual by a state; or (d) a non-expired passport issued by a foreign government to the individual; and (5) an image of the document from which the unique identifying number was obtained.

Following an initial report, a reporting company subsequently is required to file an updated report to reflect any change with respect to previously submitted information concerning the company itself or its beneficial owners.

Reporting companies and individuals may obtain FinCEN identifiers by applying to FinCEN, and thereafter individuals may provide such identifiers for purposes of a reporting company’s required reports in lieu of the information that otherwise would be required to be submitted.

Time to Comply and Penalties

The final CTA regulations become effective on January 1, 2024. Reporting companies in existence before the effective date must file a report with FinCEN no later than January 1, 2025. Any reporting company created after the effective date has 30 days from the earlier occurrence of (1) the time it receives actual notice that its creation or registration to do business is effective or (2) the date on which a secretary of state (or similar office) first provides public notice that a reporting company has been created or registered to do business.

Additionally, a reporting company has 30 days to update the required information previously submitted to FinCEN regarding changes in its beneficial ownership or information reported for any particular beneficial owner, such as a change in address. It is not necessary to update information regarding a company applicant.

Reports are to be filed with FinCEN electronically through a secure filing system that will be made available on FinCEN’s website by January 1, 2024. FinCEN will not accept reports before that date. There will not be any fees for making reports required by the CTA.

Beneficial ownership information reported to FinCEN will not be publicly available. The information is intended to be used primarily for law enforcement and national security purposes. Disclosures in certain instances (subject to conditions upon the use of that information) are allowed only to certain governmental agencies, financial institutions, and regulators.

Any person that willfully fails to submit the required beneficial ownership information, or that provides false or fraudulent beneficial ownership information, may be subject to (1) a civil penalty of up to $500 for each day that the violation continues and (2) a criminal fine of up to $10,000, imprisonment for up to two years, or both. If a person submits incorrect information, there is a 90-day safe harbor after submitting the original report, allowing that person to avoid civil and criminal penalties if the person did not knowingly submit inaccurate information with the original report and voluntarily submits a report containing corrected information.