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Overview of the New Ownership Disclosure Rules: Will your Company have to Disclose the Owners?

Business Law Andre Fiebig

Executive Summary: If your company employs more than 20 full time employees in the U.S. and has over $5 million annual gross sales in the U.S., the Corporate Transparency Act will not likely affect you. You can probably stop reading this Client Alert. If, however, you have a shell company or operations with less than 20 employees, you should be aware of how the new U.S. Corporate Transparency Act could affect you.

Discussion:

The United States is one of the few jurisdictions around the world which does not generally require privately held corporations and other legal entities to disclose the identity of the owners. The increase in the abuse of this lack of transparency has prompted the U.S. Congress to adopt the Corporate Transparency Act.

One potentially important component of the Corporate Transparency Act is the obligation imposed on companies doing business in the United States to disclose their beneficial owners to the Financial Crimes Enforcement Network of the U.S. Department of the Treasury. Although the disclosure obligation is drafted very broadly, the numerous exceptions will remove most U.S. companies with significant operations in the U.S. from the scope of the law. This client briefing should help you determine whether the Corporate Transparency Act is applicable to your company and what you will need to do.

To which companies does the new law apply?

The disclosure obligation applies to all U.S. legal entities including, for example, corporations, limited liability companies and limited partnerships that are registered with one of the U.S. States. It also applies to foreign legal entities if the foreign legal entity is registered to do business in any of the U.S. states.

What information has to be disclosed?

Companies which fall under the new law (referred to as “reporting companies”) are required to disclose to the U.S. Department of Treasury detailed information on each “beneficial owner” of the reporting company. Interestingly, the definition of “beneficial owner” captures not only the equity holders, but also senior management who might not hold any equity in the reporting company.

Specifically, a beneficial owner is each individual who, directly or indirectly, owns 25% or more of the equity interests of reporting entity as well as each person with significant responsibility to control, manage, or direct a reporting company. This would include, for example, not only the CEO and CFO, but also the president, vice presidents, treasurer, managing member (if member managed LLC), general partner (if limited partnership).

Are there any exceptions to the disclosure obligation?

The main exception is if the company employs more than 20 full time employees in the U.S., has a physical presence in the U.S. and has over $5 million annual gross sales in the U.S. Although the $5 million requirement is determined on a consolidated basis, the 20-employee requirement is determined for each legal entity. The main consequence of this exception is to remove from the disclosure obligation, businesses with actual operations in the United States. Unfortunately, small U.S. subsidiaries of foreign parent companies could be covered by the new law.

Is the information accessible to the public?

No. The information provided to the U.S. Department of Treasury is not generally available to the public. The new law imposes on the U.S. Department of Treasury the affirmative obligation to maintain the confidentiality of the disclosed information.

When does the information need to be disclosed?

The new Corporate Transparency Act takes effect on January 1, 2024. Reporting companies that do not qualify for an exemption must file their disclosure statements by January 1, 2025.

For additional information on the Corporate Transparency Act and how it may impact your business, please contact your local Quarles & Brady attorney or:

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