Protecting privacy of the underlying business owners has been a key tenet of the incorporation and organizational laws of many states.  Regardless of the valid desires in many cases to provide that privacy protection, Congress determined that disclosure of entity ownership is required - despite the laws of individual states. 

Out of concerns about foreign terrorists and money laundering going undetected, The Corporate Transparency Act (CTA) was created by Congress to require that businesses disclose who are the underlying owners.  It is also believed that this information will assist in tax investigations and potential cases of tax evasion.  The Financial Crimes Enforcement Network ("FinCEN") of United States Treasury Department has been charged with enforcing the CTA.  Most businesses will be required to file a statement with FinCEN that provides beneficial ownership information (BOI) of the business.  Businesses will need to disclose the owner's full name, home address, date of birth, driver's license number or passport number, as well as a copy of the driver's license or passport.  This information will be collected and stored in a data warehouse that will be shared with law enforcement, the IRS, and other federal and state departments.  The filing requirements begin as early as January 1, 2024. 

The CTA requires that "reporting companies" file initial reports and then subsequent updates when there is a change in beneficial ownership.  What gives many observers pause is the broad definition of a reporting company.  A reporting company is a domestic corporation, limited liability company, or any 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.  Not to be limited by domestic entities, the definition broadens to include a corporation, limited liability company, or other entity that is formed under the law of a foreign country, that registers to do business by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

There are some very specific exemptions from the reporting requirements, which generally are businesses that are already required to register with the US government.  These include the following:

• Securities reporting issuers
• Governmental authorities
• Banks
• Credit unions
• Depository institution holding companies
• Money services businesses
• Securities brokers or dealers
• Security exchanges; other exchanges registered under the Securities Exchange Act of 1934
• Investment companies
• Venture capital fund advisers
• Insurance companies
• State-licensed insurance producers
• Entitles registered under the Commodity Exchange Act
• Public accounting firms
• Public utility companies
• Financial market utilities
• Pooled investment vehicles
• Tax-exempt entities or entities assisting a tax-exempt entity
• Subsidiaries of certain exempt entities
• Inactive entities
• Large operating entities

The last exemption noted above, "large operating entities", is defined as a company that employs 20 or more full-time employees (who work on average at least 30 hours per week), have an operating presence at a physical office within the United States, and filed a federal income tax or information return in the United States for the previous year reporting more than $5,000,000 in gross receipts or sales.  Clearly, this is a very broadly-cast net that captures most small and family-owned businesses in the US that have less than $5,000,000 in revenue.

Businesses (the reporting company) subject to the CTA must disclose their beneficial owners.  Beneficial owners are individuals who, directly or indirectly, either exercise "substantial control" over the reporting company or own or control at least 25% of the ownership interests of the reporting company.  Ownership interest includes traditional stock, partner or member capital, and profits interest.  It also includes other forms of capital products like warrants, options, and convertible notes that are used to establish ownership.  The CTA also indicates that control can come through contracts, joint ownership, or control through intermediate entities.  Substantial control is present if the individual is a "senior officer" or is "exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title."

Entities (reporting companies) that were created prior to January 1, 2024 will have one year to file the initial reports. Entities that were created on or after January 1, 2024 will have only 30 days to file, measured from the earlier of its receipt of actual notice of the entity's creation or the secretary of state's provision of public notice of the entity's existence. Both older and newer entities will also have 30 days to provide updated reports when any beneficial ownership information changes. Further, a "willful" failure to file an initial report, providing incorrect information, or failing to update the report may result in civil and/or criminal penalties.

It may take them some time to update their internal processes and software, but it should be assumed that the IRS and State governments will take advantage of this treasure trove of information to expand their audit capabilities and effectiveness.  At the Federal level, it should become more difficult for an individual to omit reporting a K-1 from a partnership on their individual tax return.  States will have another powerful tool to track down any beneficial owner who uses their state as a home address. 

While the Corporate Transparency Act undoubtedly will give the taxing authorities and law enforcement new tools to fight fraud and crime, the cost of compliance (and noncompliance) and overall burden on small businesses is enormous.  It can be assumed that most bad actors will not report their beneficial ownership interests under this law, which means that those left complying with the CTA are largely going to be law-abiding taxpayers.  On top of that, an incredible amount of sensitive data is all gathered in one place, under the watchful eye of the government - what could possibly go wrong?