New Disclosure Rules for Certain Foreign-Owned Companies

Foreign Companies In the USA

When foreign or non-U.S. companies or individuals wish to register or incorporate a company in the United States, they may wish to keep their involvement with the company confidential. There are legitimate business reasons for keeping involvement in a new company confidential, for example owner anonymity may prevent competitors from gleaning future business plans. Participation in a new company is normally kept confidential in three ways. First, a third party may be hired to sign and file the registration or incorporation documents of the company. Second, few jurisdictions in the United States require legal entities to disclose information about their owners.  For example, corporations registered or incorporated in California or Delaware are only required to disclose their officers and directors, not their shareholders or stockholders. Limited liability companies in California or Delaware are similarly only required to disclose their manager, not their members. Third, the identities of the individuals who are the ultimate owners of a company can be hidden by making the legal owner of a company another corporation or LLC, and similarly the manager of an LLC can also be a corporation or LLC. There can also be multiple intermediate holding companies placed between a company and its ultimate owners, making it virtually impossible for outsiders to determine ultimate ownership.

January 1, 2024: Corporate Transparency Act (CTA) will come into effect.

Starting on January 1, 2024 however, when the newly-promulgated Corporate Transparency Act (CTA) will come into effect, the identities of the individual (called the “applicant” under the CTA) primarily responsible for directing or controlling the registration or incorporation document  for, and any individual (called the “beneficial owner” under the CTA) who exercises substantial control or owns or controls at least 25%  of, a “reporting company” must be disclosed to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury. Under the CTA, none of the above three methods used to keep ownership confidential may be employed. Even if a third party is used to sign and file the registration or incorporation document, it is the identity of individual who is primarily responsible for directing or controlling the registration or incorporation that must be disclosed. Even if the legal owner of the company is another company, this will not hide the beneficial owner, because the beneficial ownership test under the CTA includes indirect ownership, or ownership through intermediary entities, and FinCEN will look through any intermediary holding companies to the individuals who ultimately own the reporting company.

In order to determine whether or not reporting to FinCEN under the CTA is required, the first step is to determine whether or not the company in question is a reporting company. The definition of “reporting company” in the CTA is fairly complex and includes 24 listed exceptions. These are too numerous to be listed here, but to provide only one example, most public companies are excluded from the definition of “reporting company”. Generally speaking, a corporation or LLC  registered or incorporated in the United States whose beneficial owners are non-U.S. citizens or permanent residents is probably a reporting company,  unless the company has more than 20 employees and received more than $5,000,000 in gross revenue in the previous year. This means that most newly-formed  corporations or LLCs with beneficial owners who are not U.S. citizens or permanent residents will likely be required to submit reports to FinCEN under the CTA.

The report required to be submitted to FinCEN is not extensive, but must contain the following information regarding the reporting company’s applicant and beneficial owners: their full legal names, their dates of birth, their residence or business addresses, and their foreign passport numbers if an applicant or beneficial owner in not a U.S. citizen or permanent resident.  

The purpose of the CTA is to combat the use of legal entities for illegal purposes, such as money-laundering and other financial crimes. The applicant and beneficial owner data collected therefore will be used by FinCEN only for specific purposes, and FinCEN is authorized to disclose the collected data only in limited circumstances to certain governmental authorities and financial institutions. Applicant and beneficial owner data therefore will not be publicly available. Furthermore, the CTA imposes strict confidentiality, security, and access restrictions on the collected data.

To conclude, although the CTA will result in reporting requirements for many foreign-owned companies in the United States, the requirements are not overly burdensome and the ability of company owners to keep their identities confidential from potential competitors and the public at large remains unchanged.

All questions to be directed to GPS LA board member:

Adam Schorr
Law Office of Adam Schorr
Los Angeles, California USA
(310) 666-4420

Disclaimer: this foregoing discussion of certain aspects of the CTA is not a complete treatment of the subject, does not necessarily apply to any particular circumstance, and should not be considered legal advice.

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