In 2021, the United States Congress passed the Corporate Transparency Act (“CTA”). The CTA requires certain entities formed under state law to report their members, partners, owners and controlling parties to the Financial Crimes Enforcement Network (“FinCEN”), a division of the U.S. Department of the Treasury. The CTA goes into effect on January 1, 2024, and is anticipated to have a significant impact on the formation and on-going compliance associated with limited liability companies, partnerships, corporations, and other entities formed under state law, both currently in existence and formed, organized and/or incorporated in the future.
In summary, the vast majority of entities formed under state law will be required to report to FinCEN any and all individuals who meet any one of the following criteria: (a) organized or incorporated such entity; (b) exercise substantial control or management over such entity (i.e. managing members, managers, presidents, etc.); or (c) own a direct or indirect interest of at least 25% in such entity. The entities will be required to submit personal information for such individuals to FinCEN – including names, addresses, dates of birth, and images of governmental-issued identification. In addition, the entities and individuals must update such information if and when: (a) such personal information changes, or (b) circumstances change such that new individuals meet the above-mentioned criteria with regards to the entity (for example, a member sells 25% or more of his interest in an LLC to a third party not previously associated with the LLC). Failure to adhere to the CTA can lead to significant civil and criminal penalties.
The CTA will result in sweeping changes to the collection and reporting of information associated with any entity formed under any state law. It is anticipated that, in the future, operating agreements and by-laws for such entities will include reporting requirements for members, managers and other beneficial owners, and may include negotiated indemnity provisions for the failure of members, managers and beneficial owners to adhere to such reporting requirements.