Corporate Transparency Act – I don’t own anything, but my spouse does; should I be worried?

By Luz E. Villegas, J.D., LLM

Co-authored by Christi Mondrik, J.D., CPA-Austin

 

Starting Jan. 1, 2024, the Corporate Transparency Act (CTA) requires business entities (LLCs, Corporations, LPs) to file a Beneficial Ownership Information Report (BOIR) with the Financial Crimes Enforcement Network (FinCEN). This report requires not only information about the reporting entity but also about its beneficial owners.

 

Beneficial Owner Definition

 

The CTA provides two definitions for a “beneficial owner”: (1) an individual who has substantial control; or (2) an individual who owns at least 25% of the entity directly or indirectly.

 

Community Property Relevancy

 

The question for our purposes is whether community property is relevant when analyzing whether an individual owns at least 25% of the entity directly or indirectly.  

 

The answer is, it could be. The relevant regulations do not explicitly refer to community property as a form of indirectly owning an entity. However, the regulations define ownership as follows:

 

Ownership or control of ownership interest. An individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including (31 CFR 1010.380(d)(2)(ii)(A)):

(A) Joint ownership with one or more other persons of an undivided interest in such ownership interest;

. . .

[emphasis added]

 

Generally, states that observe community property laws provide that community property is owned in equal parts by both spouses. This could be construed as a relationship that, per the law, causes ownership by the non-title owner spouse.

 

There are nine states in the U.S. considered “community property states”: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Five other states have an “opt-in” community property regime: Alaska, Florida, Kentucky, South Dakota and Tennessee. Each community property state or “opt-in” state has independent and potentially different rules that need to be analyzed in a case-by-case basis by local counsel.

 

The analysis is not complete once it is determined a shareholder, member, or partner lives in a community property state. As a general rule, states observing community property laws have provisions that exclude from the community certain assets received via gifts or inheritance, or certain separate property acquired before marriage. This is important because, even if a shareholder, member, or partner, is married in a community property state, the specific interest being analyzed may not be community property.

 

Thus, when analyzing whether the ownership of one spouse should be allocated to the other spouse for BOIR purposes, it is important to inquire about how the specific ownership was acquired. It is also important to inquire if there is any agreement that could change the character of the ownership of shares, membership interests, etc. For example, a pre-nuptial or postnuptial agreement designating certain property as separate.  

 

Non-U.S. Owners

 

This topic also becomes relevant when analyzing the ownership of foreign individuals. There are countries, like Mexico, that allow couples to elect into the community property regime (“regimen de bienes mancomunados”) at the time of marriage. If they do, this analysis becomes relevant.

 

Final Considerations

 

The government has not provided specific guidance as to how this question should be addressed. While some guidance may be coming from FinCEN or Treasury, a reporting entity may need to ask each owner the following questions in anticipation of working through the legal analysis of who is a beneficial owner for BOIR purposes:

 

1. Is the owner married?
2. If yes, what state does he or she reside?
3. If in a community property state, were the shares (or membership interest or partnership interest) acquired before or during marriage?
4. Were the shares (or membership interest or partnership interest) received by inheritance or gift?
5. Is there any other agreement that could change the character of the shares (or membership interest or partnership interest)? For example, a pre-nuptial or postnuptial agreement.

 

Given these many permutations, businesses responsible for BOIR reporting should put into place checklists for gathering data to help ensure the accuracy of the information reported, and implement periodic updates to information to aid in compliance with ongoing reporting requirements as ownership changes.