The Corporate Transparency Act

The Corporate Transparency Act (“CTA”) requires most companies doing business in the U.S. to file a beneficial ownership report with FinCEN that discloses specific items of personally identifiable information (“PII”) with respect to each beneficial owner of the company.

The CTA provides that the information FinCEN collects will not be available to the public. Instead, FinCEN will maintain a database of beneficial ownership data that it will make available to law enforcement. FinCEN’s provision of that data to law enforcement will be outlined in a future FinCEN rulemaking.

Who Is a Beneficial Owner?

The PII required in a beneficial ownership report relates to a reporting company’s beneficial owners and (with respect to reporting companies formed after the effective date of the Final Rule) company applicants. 

The definition of “beneficial owner” contained in FinCEN’s regulations means, “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”

The Final Rule looks only to the “individual” and requires reporting companies to look through non-natural persons to derive the individuals who own or control them. The definition of “beneficial owner” also includes any person who “exercises substantial control.”

The Final Rule

Provides that “An individual exercises substantial control over a reporting company if the individual:

  1. Serves as a senior officer of the reporting company;
  2. Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
  3. Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:
    • The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
    • The reorganization, dissolution, or merger of the reporting company;
    • Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
    • The selection or termination of business lines or ventures, or geographic focus, of the reporting company;
    • Compensation schemes and incentive programs for senior officers;
    • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
    • Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or
  4. Has any other form of substantial control over the reporting company.”

The Final Rule’s definition is non-exclusive and requires the reporting company to include any individual who “has any other form of substantial control.” As a result, many reporting companies will need to engage counsel to consider whether particular corporate governance arrangements bring individuals within the ambit of “substantial control” and thereby render them into beneficial owners.

The Final Rule also clarifies that an individual may exercise “substantial control” over a reporting company, directly or indirectly, including as a trustee of a trust or similar arrangement, through: (A) Board representation; (B) Ownership or control of a majority of the voting power or voting rights of the reporting company; (C) Rights associated with any financing arrangement or interest in a company; (D) Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company; (E) Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or (F) any other contract, arrangement, understanding, relationship, or otherwise.

This guidance is non-exclusive and requires a reporting company to consider “any other contract, arrangement, understanding, relationship or otherwise” that might cause an individual to exercise “substantial control” in an indirect manner. Applying the “substantial control” test will be a complicated effort for many U.S. companies.

The Final Rule’s definition is non-exclusive and requires the reporting company to include any individual who “has any other form of substantial control.” As a result, many reporting companies will need to engage counsel to consider whether particular corporate governance arrangement bring individuals within the ambit of “substantial control” and thereby render them into beneficial owners.

Timeline

January 1, 2024 – The Corporate Transparency Act became law.

March 1, 2024 – The U.S. District Court for the Northern District of Alabama held that the Corporate Transparency Act is unconstitutional and cannot be enforced against the plaintiffs.

March 4, 2024 – FinCEN confirmed that it will not enforce the CTA against Winkles, the National Small Business Association (NSBAM) or any individual or entity that was a dues-paying member of the NSBA as of March 1, 2024. The ruling, however, doesn’t provide justification for any other individuals or companies to stop complying with the CTA.

March 26, 2024 – The Small Business Association of Michigan filed a lawsuit against the CTA in the Michigan 4th District Court of Appeals on the grounds that it’s unconstitutional.

April 26, 2024 – In a court hearing on Friday, April 26th, a judge stated he did not believe that there would be irreparable damage done by not issuing a preliminary injunction. The case will continue to play out in court.

May 20, 2024 – The Small Business Association of Michigan is party to an amicus brief filed in the 11th Court of Appeals, in support of the plaintiff, the National Small Business Association, in its case vs. the U.S. Department of Treasury.