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To prevent the illicit use of “shell companies” concealing illegal activity or facilitating money laundering and tax evasion, Congress enacted the Corporate Transparency Act (“CTA”) on January 1, 2021.  Although the law garnered little fanfare, it creates a registry of “beneficial owners” and imposes strict reporting to the Financial Crimes and Enforcement Center’s (“FinCEN”) anti-money laundering regulations. 

“Beneficial Owners” include individuals who (i) exercise “substantial control” over the entity, or (ii) own or control twenty-five percent of the reporting company’s ownership interests.  “Substantial control” and “ownership interests” measurements are not defined, but the forthcoming CTA Regulations will hopefully provide some clarity.  Individuals acting solely as an employee of an entity, creditors, individuals whose only interest is through a “right of inheritance,” and minor children are generally excluded from the definition of “beneficial owner.”

Reporting Companies.  The CTA applies to U.S. and non-U.S. companies registered to operate in the United States that is

  • Documents filed with Secretary of State or similar office under the laws of a U.S. state, or
  • formed under the laws of a non-U.S. country and registered to do business in the United States. 

Certain “low-risk” entities are specially exempt from coverage under the CTA, including

(1) entities with existing reporting requirements to financial regulators;

(2) entities that:

(i) employ more than twenty full-time employees,

(ii) filed a federal income tax return for the previous year, reporting more than $5 million in gross receipts, and

(iii) have an operating presence or physical office within the United States;

(3) 501(c) organizations, political organizations, and certain trusts,

(4) registered investment companies and investment advisors, and

(5) entities owned or controlled directly or indirectly by one of the above exempt entities.  Since regulations have not yet been created to enact the legislation, it remains to be seen how invasive the CTA will become and whether such information will be available to third parties.

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