On March 1, 2024, the Northern District of Alabama Northeastern Division, in National Small Business United v. Yellen, No. 5:22-cv-1448 (N.D. Ala.), ruled the Corporate Transparency Act unconstitutional. However, the holding only applies to the plaintiffs in the Alabama federal case.
While we expect more litigation and rulings regarding the CTA, at present the CTA and its requirements are still enforceable to all non-exempt companies and it is recommended all affected companies continue to comply, given the effective date of January 1, 2024.
The CTA has implications for business and introduces significant changes to corporate reporting and compliance requirements for entities in the United States. Affected businesses will now have a federal reporting requirement in addition to their state reporting requirements.
The CTA requires a Reporting Company to file reports with the Financial Crimes Enforcement Network (FinCEN) to identify the company’s owners and those who filed the formation documents creating or registering the company with the state (the “Company Applicant”).
Who is Affected: The CTA is very broad and is intended to cover most businesses, including most small businesses. A “Reporting Company” includes corporations, limited liability companies (LLCs), and similar entities formed under state law, which do not meet one of the delineated exemptions.
The CTA lists 23 exemptions, such as companies in heavily regulated industries, like federal and state credit unions, certain banks, insurance companies, and established tax exempt organizations.
Another common exemption is the Large Operating Company exemption, as defined in the CTA as having (1) at least 20 full-time employees, (2) more than $5 million in gross receipts or sales (on the latest tax return), and (3) an operating presence at a physical office within the United States.
We recommend companies not assume this exemption applies as the analysis is proving to be nuanced. For example, subsidiaries or affiliates of a Large Operating Company may not meet all of the requirements and therefore may require reporting.
What Is Required to be Reported: A Reporting Company is required to submit beneficial ownership information reports (“BOI Reports”), which include the company’s legal name, any trade name or assumed name (“DBAs”), its address, the jurisdiction in which it was formed or first registered, and its taxpayer identification number. Additionally, the Reporting Company is required to identify beneficial owners.
Beneficial owners are individuals who directly or indirectly own 25% or more of the ownership interests in the Reporting Company or exercise substantial control over the company. A Beneficial Owner and the Company Applicant (which may be up to two individuals) of a Reporting Company will be required to report their full legal name, birthdate, address, a unique identifying number from a non-expired driver’s license or other official identification document, and an image of that identification document.
Timeline for Compliance: Entities established prior to January 1, 2024, have until December 31, 2024 to file the BOI Reports. However, entities created in 2024 have ninety (90) days from the date of formation to file the BOI Reports. However, once a BOI Report is filed, a Reporting Company has thirty (30) days to file an amended BOI Report upon the recognition of an error or a change in company information.
Starting in 2025, all businesses will have thirty (30) days to file their BOI Reports. Businesses should start preparing now to comply with the new reporting requirements. It is advisable to stay updated on guidance issued by FinCEN regarding compliance procedures and deadlines.
The “Small Entity Compliance Guide” can be found here: www.fincen.gov/boi/small-entity-compliance-guide.
Penalties for Non-Compliance: Failure to comply with the reporting requirements of the CTA may result in significant civil and criminal penalties, including fines and imprisonment for willful violations.
Potential Impact and Next Steps: The CTA may necessitate changes to corporate governance practices, record-keeping procedures, and internal controls to ensure compliance with the new reporting requirements. Additionally, businesses may need to allocate resources for collecting and verifying beneficial ownership information.
We recommend that affected businesses review their corporate structures and identify beneficial owners in preparation for compliance with the CTA. It may also be prudent to seek guidance from legal and compliance professionals to navigate the complexities of the CTA and ensure timely compliance.
For further information and assistance regarding the CTA and its implications for your business, please do not hesitate to contact us.
Additional Resources around the CTA and BOI Reporting Rule:
- "FinCEN Issues Alert of Scam E-Mail to Fraudulently Solicit BOI Reporting," Financial Services Client Alert, November 2023
- "FinCEN Publishes Compliance Guide to Help Small Businesses Understand Corporate Transparency Act," Financial Services Client Alert, October 2023
- “FinCEN Publishes Reporting Requirements, Definitions of Corporate Transparency Act,” May 2023
- “Beneficial Ownership Reporting – Key Questions” and “Beneficial Ownership Information Reporting – FAQs”, March 2023
- “FinCEN Beneficial Ownership Information Reporting”