Understanding the Impact of the Corporate Transparency Act on Families and Family Offices with Complex Enterprise Structures
*UPDATE*
As many people have already heard, including leafplanner clients, the Corporate Transparency Act was found to be unconstitutional by the US District Court for the Northern District of Alabama on March 1st.
What happens next in this litigation is still speculation but a few things are clear. First, compliance with the CTA was enjoined by the Court but only for the plaintiffs in that specific litigation and members of the National Small Business Association, which was itself one of the plaintiffs. Second, it is very likely that this will result in a host of additional lawsuits, potentially broadening the plaintiffs to whom an injunction might apply, and perhaps creating a patchwork of rulings either enforcing or enjoining the CTA. Third, this particular case is very likely to be appealed to the Circuit Court and perhaps to the U.S. Supreme Court. Thus, it is likely to be a very long time until the dust fully settles.
For those in NY, at the moment, there is no reason to believe that this has any implication to the constitutionality and enforcement of a similar law passed in NY – the New York LLC Transparency Act.
Anyone considering ongoing compliance, or a decision not to comply with the CTA, should seek the advice of counsel.
For those who need a refresher, generally speaking, the CTA requires that all entities that are formed pursuant to a State filing (e.g., a Certificate of Incorporation, a Certificate of Formation, etc.) are required to comply with the CTA and report their beneficial owners, which includes those persons who have substantial control over the entity. The rules around compliance are complex and are beyond the scope of this post. Reports are generally due within 30 days of the formation of an entity after January 1, 2024, while entities formed prior to January 1, 2024 have one year to comply. Changes must be reported within 30 days.
More information below.
Summary
The Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act for Fiscal Year 2021, introduces new reporting requirements for certain entities, including family offices with complex enterprise structures. The Act aims to combat money laundering, tax evasion, and other illicit financial activities by requiring the disclosure of beneficial ownership information. This alert provides an overview of the Act's implications for families and family offices, focusing on the new filing requirements and definitions of beneficial owners.
Product Note: To help with client compliance, you'll notice that all Business Interests and Other Entities in leafplanner can now be tagged as CTA reporting companies, and related contacts can now be tagged as CTA Reporting beneficial owners.
Let's Dive Deeper
Who is Affected?
The CTA applies to all U.S. entities classified as "reporting companies," which generally includes corporations, limited liability companies (LLCs), and other similar entities. Specifically, unless an entity is excluded (and there are over 20 exclusions from the reporting requirements), if you file or filed with a state as part of the entity's organization, the entity is likely a reporting company.
Filing Requirements
- Initial Reporting:
Reporting companies are required to file beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN). Though there is talk about further changes, an entity formed before January 1, 2024, will have until January 1, 2025, to file its beneficial ownership information. An entity formed after January 1, 2024, will be required to file within 30 days of the entity's formation. Reportable information for each beneficial owner will include: - Full legal name
- Date of birth
- Current residential or business address
- An identification number from an acceptable identification document (e.g., passport or driver’s license)
- Ongoing Reporting:
Entities must update their beneficial ownership information within 30 days of any change. Failure to comply may result in civil and criminal penalties.
Definitions of Beneficial Owners
The CTA defines a beneficial owner as an individual who:
- Exercises "substantial control" over the entity, or
- Owns or controls at least 25% of the ownership interests of the entity.
The term "substantial control" is not explicitly defined, leaving room for interpretation. However, it generally refers to individuals with significant influence over the entity's activities, directly or indirectly.
Implications for Families and Family Offices
- Complex Structures: Families with intricate enterprise structures may face challenges identifying and reporting all beneficial owners, potentially requiring legal consultation. This may be especially true in the context of looking at and through various trust structures to determine ultimate beneficial ownership and control of each reporting company.
- Compliance Costs: The new reporting requirements may necessitate additional internal or external administrative efforts, leading to increased costs.
Conclusion
The Corporate Transparency Act (CTA) introduces significant changes that will impact leafplanner families. Understanding these new requirements and assessing your current structures for compliance is crucial. We recommend you consult with legal and financial advisors to ensure you meet all obligations under the Act.
For more information, please see the Final Rule, a review of key Reporting Dates, a list of Key Questions, FinCEN's FAQs about beneficial ownership, and a Beneficial Ownership Fact Sheet. Note that all of these materials are directly from FinCEN.
If you have any questions, please don't hesitate to contact us.
