For the first time, the US is tracking entity ownership and control at the federal level by requiring most entities to report ownership and control of entities to FINCEN. The vast majority of entities (corporations, limited partnerships, limited liability companies, etc.) are private. They file with a state, and most states do not require much information on owners or controlling parties (management). Some states require no information on ownership or management. The relative anonymity of entity ownership is where the government believes financial misdeeds can occur.
The Corporate Transparency Act was passed in 2021, but only becomes effective on January 1, 2024. FINCEN is tasked with CTA oversight. FINCEN is a bureau of the Department of the Treasury with a primary mission of maintaining national security through financial intelligence and combating illegal financial transactions and money laundering. Many also believe the CTA will be used as a tool to reduce tax evasion.
FINCEN now requires that each entity files a Beneficial Ownership Form when established and upon a change of ownership and/or management. The form has not been released but the information to be reported is fairly clear – for each owner with more than 25%, or someone with significant control over the entity – their name, current address, date of birth, and picture of a photo identification. There are exceptions to reporting, but are likely not applicable to most readers.
In practical terms, this means the majority of entities, businesses, holding companies, estate planning vehicles, and more should expect to file. Timing is on a rolling scale; entities that exist now have a year to file (January 1, 2025), entities formed during 2024 have 90 days to file, and entities formed after January 1, 2025 have 30 days to file. There is an ongoing obligation to file if ownership or management information changes.
Who Needs to File?
All entities that have a state filing to exist: corporations, limited partnerships, limited liability companies, etc. Notably this does not include most trusts as trusts are established by the document and not a state filing.
The CTA enumerates 23 exceptions, mostly entities that are already subject to regulations or reporting standards, with few applying to the everyday entity:
| Exemption No. | Exemption Short Title |
| 1 | Securities reporting issuer |
| 2 | Governmental authority |
| 3 | Bank |
| 4 | Credit union |
| 5 | Depository institution holding company |
| 6 | Money services business |
| 7 | Broker or dealer in securities |
| 8 | Securities exchange or clearing agency |
| 9 | Other Exchange Act registered entity |
| 10 | Investment company or investment adviser |
| 11 | Venture capital fund adviser |
| 12 | Insurance company |
| 13 | State-licensed insurance producer |
| 14 | Commodity Exchange Act registered entity |
| 15 | Accounting firm |
| 16 | Public utility |
| 17 | Financial market utility |
| 18 | Pooled investment vehicle |
| 19 | Tax-exempt entity |
| 20 | Entity assisting a tax-exempt entity |
| 21 | Large operating company |
| 22 | Subsidiary of certain exempt entities |
| 23 | Inactive entity |
Thus, this applies to entities used for operating smaller businesses (under 20 full time employees), estate and tax planning limited liability companies and limited partnerships, holding companies, real estate enterprises, professional practices, joint ventures, private funds, and most other uses.
Implications Beyond Reporting
The beneficial owner reporting is the primary issue of the CTA, but perhaps is the least impactive.
With a reporting requirement, particularly with a short time trigger of thirty days, record keeping will become very important to track ownership and management changes. The penalty for a missed deadline is up to $10,000 and 2 years in prison. The ability to accurately track and retrieve records will be an important facet. The CTA program is administered by FINCEN, an anti-crime unit. As a unit dealing with criminals, the expectation is they will employ their standard tactics, which most will find heavy handed.
Ownership and management changes should be well documented, not just for records, but for consistency. A management participant stepping away should have a resignation letter or note to file confirming when they separated. New hires should have a clear employment or consulting agreement. Human resources will become the reporting arm or need to link with whomever handles the filings promptly, rather than a year end cleanup. Ownership changes will call for sharper legal documentation to make clear the changes; purchase agreements, bills of sale, minutes approving transfers, joinders to entity operational documents, etc.
Management relationships will change. Each C-suite level participant will be part of the entity reporting. What if they do not share their information? How do they get comfortable that their information will be kept confidential and private? Contracts with management will need to address use of information, safekeeping of information, and the management participant’s agreement to cooperate with the reporting. Handling confidential data will create the duty to disclose the risks and develop a means to safeguard the information.
Commercial insurances will likely not cover CTA penalties until carriers adapt to the new rules and offer riders. Coordination amongst professionals will become more of an issue due to the short time frames; for instance, sale of equity to a new partner, but the accountant cannot file the BOI form until the legal documentation confirms the change, now the attorney needs to draft the documents, get them signed, share with the CPA, and file, all within 30 days.
Integration and organization will become the top priority.
