How Does The New Law Require Companies To Disclose the Beneficial Owner?


The one thing that never remains the same in any country is the law. It doesn’t matter what kind of rules were present initially or how broad they were; every legal system goes through a series of changes because of the changing circumstances and evolution. Well, even the laws laid down in the USA are no exception to this change. 

The majority of firms established/registered as businesses in the USA haven’t disclosed their ownership with the government. There were no issues with this approach in the USA, but now, all this is about to change. The recently established Corporate Transparency Act makes it compulsory for a specific group of businesses to disclose their beneficial owner. You should know that this new act got introduced on Jan 1st, 2021.

Certain companies (as mentioned in the new act) need to disclose their beneficial owner to the American Department of Treasury’s Financial Crime Enforcement Network. But this reporting will not take effect until the Secretary of Treasury passes the regulation. It may happen before the end of the current year. 

The completely new data collection process defined by this act will affect a long list of firms. It can also have an enormous effect on the privacy of personal information.  

The main reason behind bringing the new Corporate Transparency Act

The newly developed Corporate Transparency Act is a part of the Anti-Money Laundering Act 2020. The main motive behind establishing the new act is to combat all the financial crimes with the powerful tool of increased transparency. 

Financial Crimes Enforcement Network has criticized the missing essence of transparency while forming shell companies for a long time. This small loophole or lack of transparency has allowed terrorists, criminal-minded people, and even high-risk people to cloak their ownership and real motive. 

Hence, we can say that the new Transparency act results from the efforts of the Financial Crime Enforcement Network, and it will result in an open financial system where law enforcement can easily keep tabs on all the transactions and actual owners. 

Who falls under the new Corporate Transparency Act?

All the corporations, limited liability firms, or other similar entities that are either registered or established to do business in the USA are subject to this act. But still, we are not sure whether the same rule applies to limited partnership firms, business trust, and general partnership firms. Even in the act, there is nothing explicit about where the latter companies need to file a report or not. However, you need to ensure that you are covered if you plan on making an LLC in NY. 

Many firms got an exemption from this act, firms such as tax-exempt entities, firms operating in industries like banks, state credit unions, federal credit unions, public traded firms, insurance firms, public utility firms, etc.   

Any U.S-based firm with (1) more than 20 full-time employees, (2) filed a federal income tax return of more than $5 million in the previous years, and (3) has an active presence in a physical office based in the USA is considered exempt. But this type of exemption does not apply to any small firm based in the USA and not even to single-member LLCs. Well, the good news is this act allows the Treasury to create additional exempt categories. 

So, even if you are planning on making an LLC in NY, you must consider this law to affect your firm in the future. 

The information to be included in the report

All the firms that don’t fall into the exempt category must file a report to the Financial Crimes Enforcement Network. This report should identify the beneficial owner and the applicant by their date of birth, legal name, identification number, and business or residential address. You should include all this information in the report to comply with the new act. But this reporting needs to be done by non-exempted firms only. 

Who is a beneficial owner?

Now, you might have started wondering who a beneficial owner is as per the law? A beneficial owner is an individual who has substantial control over the firm or owns at least 25% of ownership in the firm. If a person whose license comes from being an employee of the firm, he or she will never be considered a beneficial owner. 

In the future, during the implementation of this act, it will indeed have a more complicated, detailed, and significant definition of a beneficial owner since the current description of a beneficial owner is quite simple. It is necessary to develop a more defined meaning of a beneficial owner since this whole act revolves around the beneficial owner. Now that you have understood who a beneficial owner is (according to the existing definition), it’s high time for you to get familiar with the term applicant as well.  

Who is an applicant?

An applicant can be anyone who files a proper application to form a limited liability firm, corporation, or any other type of entity. In addition to this, an applicant can also be a person who registers a foreign firm, limited liability company, or similar firm to do business in the states. In some cases, the applicant can include even corporates identified in the Initial Article of Incorporation. 

Along with this, an applicant can also be an authorized representative, manager, or member of a limited liability company, as per the definition given in Articles of Organization, Form 533A. Even authorized or official representatives of a foreign limited liability company as defined in the Registration of Foreign Limited Liability Company can be applicants. This broad scope of applicants means that even many paralegals and attorneys will have to file the report for disclosing the beneficial owner. 

New York and all the states other than Ohio have a proper system where the annual filing of reports is compulsory for businesses. Such reports are filed annually by the companies and include clear identification of directors and officers. In such reports, there is no need to disclose the identity of the beneficial ownership. 

So, if you are making an LLC in NY, you must keep all these aspects of the new act in mind; else, you will cross the legal boundaries of the country and later find yourself in trouble. 

The timeline of disclosing information

If your firm came before the enactment of Treasury regulation, then you must submit the report within two years from the date of enactment of the new act. So, most probably, the latest date for disclosing the information will be around 2023 since the new act will come into action by the end of 2021. 

And all the firms that will be launched after the enactment of the new act must submit the information regarding the disclosure of beneficial owners at the time of registration. It implies that all the alterations made in the report, like change in address ownership, etc., must be updated within a year. 

What will happen with all this information?

The intention behind launching the new act and making most of the businesses fall under its rules is good, but you should look at the other side of the coin as well. As soon as the new act comes into play, there will be new privacy issues among firms. Under the new rules, all the information given by the firms to the respective government entities will be kept confidential, and they will never be made available for ordinary people. This is something you need to consider while making an LLC in NY. 

But the Department of Treasury can get access to all this information for tax-related purposes. A crucial point to note here is that the Financial Crime Enforcement Network can disclose this sensitive information in the following cases.

  • On request from a federal agency involved in law enforcement activity, intelligence-related activity, and security-related activity
  • On request from a local or state law agency with the approval of the court for civil and criminal investigations
  • On request from a regulatory agency or federal functional regulator

The penalties of not complying with the new act

Any person who willingly submits false identification of the beneficial owner or fails to file a report identifying the beneficial owner is subject to a civil penalty of a maximum of $500 for every day of noncompliance, a fine of up to $10,000, or two years of imprisonment. 

 Soon, the new act will make it compulsory for many businesses to show their actual beneficial owner, and failing to do so can put you in serious trouble. So, get ready to deal in a more transparent environment where legal loopholes will be less.

Windsor Corporate Services is a company known for the reputation of its swift and efficient LLC services and will be the ideal choice for your venture. With ample experience in the field and the necessary knowledge to take care of all the procedural complexities, we assure you an experience like never before.

We provide all the information related to LLC information in New York. If you need assistance with making an LLC in NY, contact us today.

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