Are You and Your Company Impacted by the Corporate Transparency Act?

The answer is probably yes, so you should pay careful attention to the information below. The Financial Crimes Enforcement Network of the United States (FinCEN) has set forth stiff penalties to anyone who chooses to ignore or disregard their reporting obligations.

The Corporate Transparency Act (CTA) officially went into effect as of January 1, 2024. The CTA requires reporting through FinCEN, which is a division of the United States Treasury Department. FinCEN has established a national registry, which will contain personal identifying information about the more than 32 million companies that the CTA is expected to affect.

Background

The CTA was authorized as part of the National Defense Authorization Act of 2021. The objective of the CTA is to fight against money laundering, terrorist financing, corruption, tax fraud, and other nefarious activity. FinCEN was set up by the U.S. government to support that objective by requiring beneficial owners of entities to report. The objective is to make it difficult for bad actors to conceal financial activities through entities with undisclosed or muddied ownership structures.

Timely Reporting is Mandatory

Existing entities formed before January 1, 2024, must file an initial reports no later than January 1, 2025. Newly-formed companies created after January 1, 2024, must file their initial reports 90 days after receiving notice of their creation or registration.

Who Must Report?

Reporting Companies and their Beneficial Owners (see definitions below).

‘Reporting Companies” are defined broadly by the CTA as any corporation, limited liability company, or other similar company created by filing a document with the secretary of state or similar office in any state, territory, federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.

“Beneficial Owners” are defined by the CTA as individuals who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (a) exercise substantial control over the company; or (b) own or control at least 25% of the equity interests of the company.

Any company considered a Reporting Company will be required to file a beneficial ownership information report (“BOI report”) with FinCEN’s Beneficial Ownership Secure System (“BOSS”).

Exceptions to Reporting Requirements

The CTA provides 23 exemptions from reporting. Exemptions from the reporting requirements mainly consist of exemptions for certain regulated industries and non-profit organizations. The CTA also provides other exemptions that are reserved for large companies with more than 20 employees and $5 million in annual revenue and their wholly owned subsidiaries, and limited exemptions for inactive or dormant companies.

What Information Must be Reported?

Reporting Companies must include the following information: (a) legal name, all assumed names, and/or all trade names for the company; (b) actual street address for the company’s principal place of business; (c) state of formation of the company; and (d) identification number of the company.

As part of the BOI report, Beneficial Owners and Company Applicants are required to disclose their personally identifiable information, including current address, date of birth, and an unexpired passport number, state identification document, or driver’s license number. To help simply reporting, FinCEN will issue a unique FinCEN identifier to individuals who are required to make multiple BOI reports upon request. A “Company Applicant” under the CTA is an individual who files the document that forms the company.

Penalties and Fines Under the CTA

The failure to comply with the FinCEN requirements, or the willful provision of or attempt to provide false or fraudulent Beneficial Ownership information may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties, including imprisonment of up to two years and/or a fine of up to $10,000.

Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a Reporting Company not to file a required a BOI report or to report incomplete or false Beneficial Ownership information.

Constitutionality of the CTA

On March 1, 2024, the U.S. District Court for the Northern District of Alabama declared the CTA unconstitutional in the case of National Small Bus United, d/b/a the Nat’l Small Bus Ass’n v Yellen, No 5:22-cv-1448-LCB, ___ F Supp 4th ___ (ND Ala Mar 1, 2024). The court held that the CTA “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” Slip op at *3. It is important to note that the court did not issue a blanket ruling prohibiting enforcement of the CTA to parties other than the plaintiffs. The ruling certainly makes the future of the CTA unclear. Until the CTA is struck down for all U.S. business entitles, the obligation to comply with the CTA shall remain effective.

Help is available

The best way to avoid any negative consequences discussed above is to take a proactive approach as soon as possible. To speak with an attorney, please call 586-726-1000 or visit our website.