Effective January 1, 2024, a new filing requirement was imposed on many business entities, particularly smaller privately held companies, by a new federal law named the Corporate Transparency Act (“CTA”). However, soon after, on March 1, 2024, a federal judge in the U.S. District Court for the Northern District of Alabama held the CTA to be unconstitutional as a matter of law.[1] That case will undoubtedly be appealed. In National Small Business United v. Yellen, the district court concluded that the CTA exceeded the Constitution’s limits on congressional authority—specifically characterizing the CTA as regulating incorporation, which is a “purely internal affair” that is (i) not clearly economic or commercial in nature and (ii) too incidental to tax administration. Consequently, the court declared the CTA unconstitutional and permanently enjoined the United States Department of the Treasury and the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Treasury, from enforcing the CTA against the plaintiffs in that case, mostly members of the National Small Business Association (NSBA), the plaintiff organization that appeared before the court. Thus, the effect of this court decision is narrow and limited: the CTA remains in full effect except as to members of the NSBA and possibly reporting companies in the Northern District of Alabama. The following discussion concisely summarizes the CTA and what it entails to help businesses be prepared.
The CTA was enacted as part of the Anti-Money Laundering Act of 2020 and applies to entities deemed to be “Reporting Companies,” discussed below. The goal of the CTA is to address concerns about illicit activity by the use of obscure U.S. business entities—including money laundering, the financing of terrorism, tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption—by requiring Reporting Companies to provide governmental authorities with information about their beneficial owners and controlling persons. The focus of the CTA is not on larger companies but rather on smaller and medium-sized legal entities, including shell companies, that generally either:
- are not subject to supervision by other regulatory agencies (e.g., entities regulated by the Securities and Exchange Commission and Commodity Futures Trading Commission, or organizations that are tax-exempt under the Internal Revenue Code), or
- employ fewer than twenty-one full-time employees and generate less than $5 million in annual U.S. revenue.
Specifically, a “Reporting Company” is: (a) any company that is created by filing a document with a governmental agency (including a federally recognized Indian Tribe), such as a corporation, a limited liability company, or a limited partnership; or (b) a foreign-formed entity that is registered or registers to do business in the United States. Although the CTA includes twenty-three categories of businesses that are exempt from the CTA, these exempt businesses generally are already extensively regulated by the federal government or a state government. Also exempt from the CTA, for example, are sole proprietorships and general partnerships, because they are not formed by filing a document with a governmental agency.
Reporting Companies are required to file a Beneficial Ownership Information Report, or “BOIR,” with FinCEN (more information can be found at FinCEN’s beneficial ownership information webpage). The BOIR requires information about the legal entity as well as personal information about those in substantial control of the Reporting Company. Such control can derive from (a) ownership interests (the BOIR must include anyone with 25 percent ownership interest of the entity), and/or (b) the right or ability to exercise substantial control over the legal entity through official positions or contractual, familial, or other arrangements. In addition, for a Reporting Company established or registered to do business in the U.S. in 2024 or later, the BOIR must also include information about its “Company Applicant(s),” which generally means (i) the person who directly files the pertinent document with a governmental agency and (ii), where more than one person is involved in the filing of such document, the person primarily responsible for directing or controlling that filing. If a person has reason to believe that a BOIR filed with FinCEN contains inaccurate information and voluntarily submits a report correcting the information within ninety days of the deadline for the original BOIR, then the CTA creates a safe harbor from penalty. In addition, once a Reporting Company has satisfied its CTA obligation by filing a BOIR, it must file an updated BOIR within thirty days of any change to the information about the entity or its beneficial owners, and it must file a corrected BOIR within thirty days of becoming aware of, or of when it should know of, any inaccuracy in the information about the entity or its beneficial owners on a filed BOIR. However, a Reporting Company is not required to file an updated or corrected BOIR if information about its Company Applicant changes. The information in a filed BOIR will not be available to the general public, but it will be available to federal and state law enforcement agencies.
Although the legal entity subject to the reporting requirement has the primary obligation to file a BOIR with FinCEN, individuals or other entities may also be found to have violated the CTA (e.g., because they caused the Reporting Company to fail to satisfy its reporting obligations). There are two ways a person can violate the CTA and be liable: (a) reporting violations (i.e., knowingly causing a Reporting Company not to timely file or update its BOIR or providing or assisting in the knowing provision of false or fraudulent information to FinCEN); or (b) disclosure-and-use violations (i.e., knowingly disclosing or using beneficial ownership information provided to FinCEN for an unauthorized purpose). For reporting violations, the CTA establishes: (i) civil penalties of up to $500 for each day a violation continues or has not been remedied; and (ii) criminal penalties of up to $10,000, imprisonment for up to two years, or both. For disclosure-and-use violations, the CTA establishes: (i) civil penalties of up to $500 for each day a violation continues or has not been remedied; and (ii) criminal penalties of up to $250,000, imprisonment for up to five years, or both. Based on the foregoing, FinCEN will determine the appropriate enforcement response for willful failure to report complete or updated beneficial ownership information to FinCEN (or failure to report at all) as required under the CTA.
Nat’l Small Bus. United v. Yellen, No. 5:22-cv-1448-LCB (N.D. Ala. Mar. 1, 2024). ↑
