For over 20 years, there has been a running battle between regulators seeking disclosure of the ultimate beneficial ownership of LLCs and other business entities (highlighting their occasional use for money laundering, terrorism and other crimes) and business groups fighting such disclosure in the name of privacy and confidentiality. On January 1, 2021, the issue was resolved when Congress overrode President’s Trump’s veto of the 2021 National Defense Authorization Act.  Included in that Act was the Corporate Transparency Act (“CTA”), imposing a broad regime of requiring entities present in or doing business in the U.S. to report their principal direct and indirect individual beneficial owners. While the CTA sets up the basics of the regime, implementation of much of the CTA is delayed until the U.S. Treasury issues regulations on or before Jan. 1, 2022, giving the Financial Crime Enforcement Network (“FinCEN”) time to create a database and filing procedures. And also will hopefully clarify many of the ambiguities in the CTA.

The basic structure of the regime is that every U.S. corporation, LLC and similar entity (presumably including limited partnerships), as well as such foreign entities qualified to do business in the U.S., not specifically exempted must report beneficial ownership information. Exempt entities include publicly traded entities, banks and other specifically mentioned regulated entities, and any entity which (a) employs more than 20 full-time persons in the U.S., (b) with its U.S. subsidiaries and affiliates has annual gross receipts or sales in excess of $5,000,000, and (c) has an operating presence at a physical office in the U.S.

Non-exempt entities organized or qualified after the effective date of the forthcoming Treasury rules must file a report with FinCEN when they are organized or qualified; previously existing entities must file within two years after the effective date of the Treasury rules. Initially, subject to further review, changes in beneficial ownership must be reported within one year of the change. Exempt entities will have to claim their exemption.

A beneficial owner is a natural person “who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls not less than 25% of the ownership interests of the entity. “Substantial control” is a remarkedly open-ended subjective definition, particularly since failure to comply carries both civil and criminal penalties. The identity of the person having substantial control at the ultimate level may be withheld from the reporting entity. And if substantial control is held by a lender after default, who is the natural person who should be listed. One hopes that the regulations will begin to clarify this. Even the apparently objective 25% test will be difficult to apply to entities with complex multi-tiered capital structures as, for example, are often found in real estate transactions. There are statutory exemptions from the beneficial owner test, including nominees and employees “whose control over or economic benefit from” the entity are derived solely from their employment status.

The report with respect to a beneficial owner must contain the owner’s name, residence or business address, date of birth and a unique identifying number from an acceptable identification document like a passport. The reported information is not publicly available, but will be available from FinCEN to certain federal and state agencies for investigatory, law enforcement or national security purposes, to regulatory agencies, to federal agencies on behalf of foreign countries for similar purposes, and with the consent of the entity to financial institutions in support of compliance with customer due diligence requirements, which under the CTA are required to be brought into conformance with the CTA.

Finally, the CTA prohibits the issuance of bearer shares or LLC bearer interests by an entity formed under the laws of a U.S. state or possession or an Indian tribe. Although this is not clear, by its terms this prohibition appears to be already in effect. It is also not clear what effect, if any, this provision has on existing bearer instruments, though the restriction is phrased in terms of “issuance.”

Despite the delayed implementation of the CTA, there are a number of things that businessmen and their attorneys should be doing now in preparation:

1. Determine which of their present entities are likely not to be exempt from beneficial ownership disclosure under the CTA.
2. Review the structure of each non-exempt entity to discover any problematic issues, remembering that the beneficial ownership test has two prongs, control or 25% ownership.
3. Amend your shareholders’ agreement, LLC operating, or limited partnership agreement to add a covenant and agreement by each shareholder, LLC manager, LLC member, limited partner and general partner timely to provide any and all information necessary for the entity to report and update beneficial ownership information, including such person’s personal identifying information and acceptable identification document.

Dentons stands ready to assist you in these steps and answer any questions you may have.