The Corporate Transparency Act: Implications for Family Offices
The Corporate Transparency Act (CTA), set to take effect on January 1, 2024, is poised to introduce significant changes to the disclosure of beneficial ownership information for various entities operating within the United States. While primarily targeting domestic and non-U.S. entities doing business in the U.S., the CTA also extends its reach to family offices and wealth management entities. In this article, we'll delve into the key aspects of the CTA and its potential impact on family offices.
Understanding Reporting Entities
The CTA casts a wide net, encompassing a category known as "Reporting Companies." This term includes domestic and foreign corporations, limited liability companies, limited partnerships, and similar entities that conduct business within U.S. states or tribal jurisdictions through formal filings.
For family offices and family investment entities, which often fall under these definitions, this means compliance with the CTA may be necessary.
Exemptions for Family Offices
While the CTA applies broadly, certain exemptions can apply to family offices and family investment entities:
Existing Federal Reporting: Entities already subject to federal reporting, such as registered investment advisers, may be exempt from CTA reporting.
Large Operating Companies: Larger family offices that meet specific criteria, including having over 20 full-time employees, a physical U.S. office, and annual gross receipts exceeding $5 million, may qualify for an exemption.
Tax-Exempt Entities: Private foundations and other tax-exempt entities are typically exempt from CTA reporting.
Inactive Entities: Some inactive entities may be exempt from reporting.
Certain Trusts: Trusts that aren't created through state filing offices are unlikely to be classified as Reporting Companies.
Defining Beneficial Owners
The CTA introduces the concept of "Beneficial Owners," defined as individuals who either directly or indirectly exercise substantial control over a Reporting Company or own or control at least 25% of the company's ownership interests. Importantly, even if no one owns 25% or more, there must still be at least one Beneficial Owner identified.
In the context of family offices, Beneficial Owners may include the principal owner(s), senior management, and trustees (and sometimes beneficiaries) of trusts that own Reporting Companies.
Timeline for Compliance
Entities formed after January 1, 2024, must report Beneficial Ownership Information (BOI) within 30 days of their organization. For entities existing before this date, the reporting deadline is January 1, 2025. Any subsequent changes in beneficial ownership should be reported within 30 days.
What BOI Entails
Reporting Companies must provide comprehensive identification information about themselves, Beneficial Owners, and Company Applicants. This includes full legal names, dates of birth, current addresses, unique identifying numbers from official identification documents, and copies of these documents.
Access to Information
The CTA mandates that FinCEN maintain BOI in a secure, nonpublic database accessible to federal agencies for national security, intelligence, or law enforcement purposes. State, local, or tribal law enforcement agencies may access this information if authorized by a court.
Penalties for Non-Compliance
Failure to adhere to CTA reporting requirements or unauthorized disclosure of BOI can result in civil or criminal actions. Willful failure to file a complete report could lead to fines and imprisonment.
Preparing for the Change
Family offices and family investment entities should proactively review their entity ownership and structures to ensure compliance with the CTA. Gathering the required information and documents for filing will be crucial once the rules become effective.
In conclusion, the Corporate Transparency Act brings a new level of transparency and reporting obligations to various entities, including family offices. Navigating these changes will necessitate a thorough understanding of the rules and a commitment to compliance to avoid potential legal repercussions.