A New Federal Registry of Direct and Indirect Entity Ownership

By Stanley Rose December 28, 2022

In early 2021, Congress set in motion a new law that will unmask many business owners, forcing them to participate in a new national registry that, beginning in 2024, will list direct and indirect ownership of most U.S. entities, and capture and maintain very specific, personal information regarding each of those owners and certain non-owner executives. The legislation promised that administrative and implementation rules would follow, containing more details, and those rules recently were released.

This is not an obscure requirement with limited application. Instead, it will sweep up nearly every small business owner, including those of partnerships, LLCs, S and C corporations, and even sole proprietorships.

Background/rationale

The nearly 1,500-page National Defense Authorization Act of 2021 (Public Law 116-283) contains numerous individual pieces of legislation, including a section (Division F) that began life as the Corporate Transparency Act of 2019. It authorized the Treasury Department to issue specific rules implementing the legislation. Through its Financial Crimes Enforcement Network (“FinCEN”), Treasury responded by creating and distributing proposed rules, and soliciting (as is common) public comments. It then proceeded with, in its words, “adopting the proposed rules largely as proposed.” The resulting final rules are found in RIN (Regulation Identifier Number) 1506-AB49, published in the Federal Register as 87 FR 59498.

The Corporate Transparency Act (“CTA”) was created because Congress and Treasury believe that because ownership of U.S. entities has been pretty opaque, it allows terrorism, money laundering, and other misconduct to occur and elude detection. Their reaction arguably creates a somewhat onerous burden on most U.S. business owners, and is accompanied by severe penalties for those who choose to ignore the new requirements.

Who does the new rule apply to?

Any entity categorized as a “reporting company” is subject to the CTA rules. Reporting companies consist of corporations, partnerships, LLCs, business trusts, and any other entities that are created by the filing of documents with a secretary of state or its local or foreign equivalent.

However, a number of exceptions apply. First, “large businesses” are exempt, which includes any company with 20 or more full-time U.S. – based employees, a physical operating presence within the U.S., and more than $5 million in U.S. – derived revenue. Tax-exempt entities are immune to the CTA rules, as are certain entities that support them.  Most trusts appear to sidestep the requirements because trusts usually are formed privately, without the involvement of a secretary of state. Several specific types of entities are exempt, including banks, investment advisors, insurance companies, and accounting firms. Presumably, these entities are exempt because they already are “on the grid” with various government agencies as a result of other legislation like Dodd-Frank or Sarbanes-Oxley. Finally, fully – owned (but not partially – owned) subsidiaries of exempt businesses are also exempt.

What is required?

Reporting companies must file a report (not yet in existence), providing specific details regarding each beneficial owner and others with control or oversight over a company. Companies in existence before 1/1/24 must file initial reports by 1/1/25. Companies formed on 1/1/24 or later must file within 30 days of formation. The information must be updated if ownership or other information changes, but it otherwise is a one-timing filing.

The information to be reported includes:

2. For the company – the EIN, mailing and street addresses, legal name and any “DBA” name of the company.
3. For “beneficial owners” of the company – their names, dates of birth, street addresses, and identifying numbers (from driver’s licenses, passports, or state/federal I.D.); to be submitted with photocopies of those identifying documents.

For this purpose, the term “beneficial owner” is defined simultaneously more broadly and more narrowly than it seems. It includes any of the following:

1. Any person who owns, directly or indirectly, at least 25% or more of the company. Ownership can include stock or other units; capital or profits interests; convertible assets (puts, calls, straddles); and in some cases, in one’s capacity as trustee or beneficiary of a trust.
   Observation: Some reporting companies will have to file a CTA report, but will not necessarily need to include all of the company’s owners on that report (properly omitting those with less than 25% ownership). However, entities with tiered ownership may need to dig a bit deeper into their owners’ ownership, all the way to the top level (gaining information perhaps not readily available to them), because indirect ownership may trip the 25% threshold even if direct ownership does not.
2. Any person who “exercises substantial control” over that company. This can include executive officers, board members, or others with significant influence – even if they hold no actual ownership in the company.
3. The applicant (for entities formed after 12/31/23). Often an attorney or other person will file the document that forms an entity on behalf of the entity’s owner(s). For new entities, that applicant’s personal information will be required in addition to that of other “beneficial owners.”

A minor’s information is not required, as long as information regarding that child’s guardian is provided instead.

What happens to those who don’t comply?

In other contexts, Treasury’s FinCEN division arguably has a pretty consistent track record of accommodating inadvertent noncompliance with rather reasonable penalties, but is not known for their light wrist-slapping for those who deliberately ignore its rules. CTA violators can be assessed daily penalties of $500, and fines as high as $10,000.

Who can access this information?

FinCEN is still working on details, but envisions that the CTA reports and database will be available primarily to law enforcement – federal, state, and local.  It is not available to the public, even via Freedom of Information Act requests.  Under certain circumstances it appears that financial institutions may gain access.

Obviously, a database with this kind of personal information will be a target of miscreants.  Those responsible for unauthorized disclosure of CTA details (including insiders) may face penalties as high as $250,000 and imprisonment.

Conclusion

The new CTA registry is an entirely new federal database that will contain highly personal information of small business owners (including “ma and pa” shops), as well as many executives working for them.  The purpose of this article primarily is to make business owners aware of the requirements, which seem to have flown under the radar – partly because the initial filings are still a year away, but partly because many business owners have no direct contact with FinCEN, and the messaging just hasn’t reached them.

There is not much that business owners need to do to prepare at this point, other than making “beneficial owners” (which includes more than just owners) aware that some highly personal information will be needed before long; and perhaps making arrangements to understand “tiered” ownership above that of their own direct ownership.

In any case, bad actors should have a harder time escaping detection.  But for the larger category of good actors, the days of bringing a business to life by simply filing minimal data with a secretary of state and obtaining a tax EIN online are coming to a close.

For more information, please contact your BNN tax service provider at 800.244.7444.