Corporate Transparency Act: Where It Stands & Lessons Learned

One wouldn’t know it from its title, but the National Defense Authorization Act of 2021 has a significant effect on the business world. In a mere 22 pages among the act’s 1,480 pages — combined with the Anti-Money Laundering Act of 2020 — Congress created what we now know as the Corporate Transparency Act (CTA).

Today, only a few months since the CTA went into effect, its constitutionality is being challenged in court by various states. Until those cases are resolved, companies should either meet or prepare to meet the requirements set forth in the CTA.

Applicability & reporting requirements of the CTA

The CTA requires that certain entities formed or registered to conduct business in the United States file a beneficial ownership information (BOI) report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The entities subject to the CTA include most privately held corporations, limited liability companies, limited partnerships and other similar entities, regardless of whether they are domestic or foreign. The BOI report required to be filed by the reporting companies discloses certain information about the company’s owners, management and individuals who assisted in the creation of the company. 

Beneficial owners are considered to be individuals who, directly or indirectly, either exercise substantial control over a reporting company or own or control at least 25% of the ownership interests of a reporting company. The definition of “substantial control” is fairly vague; however, it includes any person who 1) exercises authority as a senior officer, regardless of title, 2) has authority to appoint or remove a senior officer or a majority of the board of directors, 3) directs, determines or has substantial influence over “important matters” (e.g., finance, business, structure), and 4) has any other form of substantial control over the company besides those listed. See 31 C.F.R. § 1010.380(d)(1)(i)(D). Thus, unless you clearly do not meet the guidelines above or fall within one of the following categories: (i) minor children (parents or guardians are required to report in this instance); (ii) nominees; (iii) employees, other than senior officers; (iv) future inheritors; or (v) creditors, you qualify as a beneficial owner of the reporting company and should be included in the beneficial ownership report.

Notwithstanding the preceding, the CTA specifically sets forth 23 exemptions to its definition of “reporting company,” which include, among others, certain tax-exempt entities and other types of entities.

Reporting companies are required to comply with the BOI requirements and make any required filings in accordance with the following timelines, which are based on their respective date of formation or registration in the United States:

• If the company was formed or registered before Jan. 1, 2024, the BOI report must be filed by the end of this year.
• If the company is formed on or after Jan. 1, 2024, and before Jan. 1, 2025, the BOI report must be filed within 90 days of formation or registration.
• If the company is formed on or after Jan. 1, 2025, the BOI report must be filed within 30 days of formation or registration.

Any updates to BOI, errors relating to BOI or changes related to the entity’s status as a reporting company must be reported within 30 calendar days of such change. Willful failure to report, complete or update the ownership information report, or the willful submission of or attempt to provide false or fraudulent BOI can result in severe penalties, both civil and criminal. Such penalties may include civil fines of $500 per day up to a maximum of $10,000 and possible imprisonment of up to two years.

Compliance

Data Protection Demands Complicate CTA Compliance

by Lowenstein Sandler

February 28, 2024

As the calendar rolled over into 2024, a new reporting obligation went into effect for millions of American companies, the Corporate Transparency Act. A trio of experts from Lowenstein Sandler explore the privacy implications of a database of sensitive corporate ownership information.

Read more

Unconstitutionality of the CTA & National Small Business Association

On March 1, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional in response to a lawsuit brought by the National Small Business Association (NSBA). The association is an Ohio nonprofit focused on small business advocacy that has been a vocal critic of the law since its passage. In its lawsuit, first brought in November 2022, the NSBA and one of its members, Isaac Winkles, argue that the CTA’s mandatory disclosure requirements exceeded the authority of Congress under Article I of the U.S. Constitution and violated the First, Fourth, Fifth, Ninth and 10th Amendments. The government argued that Congress has the authority to enact the CTA under three parts of the Constitution: 1) its foreign affairs powers; 2) its authority under the Commerce Clause; and 3) its taxing power and the Necessary and Proper Clause, since one purpose of the FinCEN database created by the CTA is to assist in efficient tax administration. 

The court rejected all of the government’s arguments and agreed with the NSBA and Winkles, ultimately declaring the CTA unconstitutional for failing to fall within the bounds of the Commerce, Taxing and Necessary and Proper Clauses. Specifically, the court found 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.” Given its conclusion, the court found it unnecessary to address the allegations that the CTA violates the First, Fourth and Fifth Amendments. Subsequently, the court permanently enjoined the government from enforcing the CTA only as to the NSBA and Winkles, and, importantly, not as to any other entities subject to the CTA. Furthermore, it should be noted that this case was decided on summary judgment — meaning over the law itself — and not on any facts related to this case.

In response to the court’s ruling, FinCEN released a statement asserting that the government has filed a notice of appeal with the U.S. Court of Appeals for the 11th Circuit but that it would comply with the court’s decision while litigation is ongoing. Consequently, FinCEN stated that it would not require Winkles, his reporting companies or the NSBA to make any disclosures, reports or filings under the CTA.

This statement is significant for various reasons, the most prominent being its acknowledgment that the injunction issued by the court applies to all of the members of the NSBA, which is an organization that has more than 65,000 businesses and entrepreneurs located in all 50 states. Nonetheless, it should be noted that FinCEN did limit the court’s injunction to apply only to NSBA members as of March 1, 2024, which was the date the court’s decision was issued. Moreover, in addition to the appeal and aforementioned limitation, the government may seek a stay of the court’s ruling pending the appeal, which would pause the effect of the ruling until the 11th Circuit decides the case.

Notably, the court’s ruling deals only with the federal CTA passed by Congress and does not affect other similar legislation passed in any state. Since the court’s ruling, other lawsuits have been filed in various states that mirror the Alabama case and question the CTA’s constitutionality. As such, for now, the constitutionality of the CTA will remain in question.

Lessons learned & next steps

Although the constitutionality of the CTA is undetermined, the deadlines related to the CTA remain in effect for most companies. In light of the narrow scope of the judgment from the Alabama case, FinCEN’s statement regarding the Alabama case, and the government’s notice of appeal, companies and individuals not involved in the Alabama case or who were not members of the NSBA as of March 1, 2024, should assume that they are subject to the CTA. Thus, all entities subject to the CTA should continue taking all necessary steps to comply or prepare to comply with any terms of the CTA without interruption. 

Suggested actions for business owners or existing companies to help prepare for the Jan. 1, 2025, deadline include, among other things, the following: 1) determine whether the entity is a reporting company under the CTA; 2) determine whether the entity qualifies for any of the 23 exemptions provided in the CTA; 3) analyze the structure and beneficial ownership of the entity, including individuals who have “substantial control” over the entity; 4) coordinate with any beneficial owners to obtain information required by the CTA; 5) prepare any required reports to ensure all information needed has been provided; 6) consider new processes and procedures the entity might put in place to monitor future changes in its beneficial owners and reportable changes on existing beneficial owners to ensure timely updated reports are filed with FinCEN; and 7) review the entity’s organizational documents and determine whether they should be amended to include provisions relating to the CTA. 

Although they may look daunting, for most entities with straightforward entity structures, the reporting requirements of the CTA are fairly simple. Given the number of questions since the implementation of the CTA, FinCEN has created an FAQ section on its website, which it updates on a regular basis. This section is very informative and a good resource for all business entities and owners.