What is the Corporate Transparency Act?
The Corporate Transparency Act (“CTA”) went into effect on January 1, 2024, requiring state-chartered business entities to report their Beneficial Ownership Information (“BOI”) online into a new federal database. The Financial Crimes Enforcement Network (“FinCEN”)[1] will create and maintain this database.[2]
The CTA is a federal law passed in early 2021 that took effect on January 1, 2024. It was first passed by the U.S. Congress. Before President Trump left office, he vetoed the bill. Congress then overrode President Trump’s veto, making this bill a law.
Why Should Every Business Owner Care?
Regardless of size, the new law will affect nearly every business in the country. FinCEN may issue fines or penalties for non-compliance. Nobody likes getting fined, especially by the federal government. The Small Entity Compliance Guide states that fines may be up to $500 per day for non-compliance or criminal penalties, including up to two years in prison and/or a fine of up to $10,000.[3]
Who is Required to Report BOI?
Companies that qualify as “reporting companies” but do not qualify for an exemption must report their BOI. A reporting company may be either a domestic or foreign entity. A “domestic reporting company” is defined as a corporation, limited liability company (LLC), or similar entity formed by filing documents with the secretary of state or its equivalent office under the state’s law. A “foreign reporting company” is defined as a corporation, LLC, or similar entity formed under the laws of a foreign country and registered to do business under the laws of a U.S. State or tribal territory.[4]
Who Is a Beneficial Owner?
A Beneficial Owner is any individual: who (1) owns or controls at least 25% of the ownership interests of the reporting entity; OR (2) who exercises substantial control (direct or indirect) over the reporting entity’s business or finances or structure or major decisions.[5]
Who Does Not Qualify as a Beneficial Owner?
The definition of beneficial owner includes five exceptions: a minor child; a nominee, intermediary, custodian, or agent; a mere employee; a holder of a future interest in an entity (an expected heir or inheritor); and creditors or other similar entities.[6]
What are Exemptions to Reporting?
The scope of the CTA’s reporting requirements is narrowed by excluding 23 categories from the definition of Reporting Company. Many exemptions exclude companies already subject to significant oversight from other agencies or governing bodies. The list includes the following 23 exemptions to the Reporting Company requirement: securities reporting issuers, governmental authorities, banks, credit unions, depository institution holding companies, money services businesses, brokers or dealers in securities, securities exchange or clearing agencies, other Exchange Act registered entities, investment companies or investment advisers, venture capital fund advisers, insurance companies, state-licensed insurance providers, Commodity Exchange Act registered entities, some accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax-exempt entities, entities assisting a tax-exempt entity, large operating companies, subsidiaries of certain exempt entities, and inactive entities. Businesses of any size should review these exemptions in detail with competent counsel to ensure compliance.
What Information Is a Business Required to Report?
Every reporting entity is required to report the following information about itself: The entity’s full legal name; all trade names and DBAs associated with the entity; the complete current street address of the entity’s principal place of business in the United States (P.O. Boxes are not permitted); the entity’s state of formation; and the entity’s FEIN.
Each Beneficial Owner is required to provide the following information: the owner’s full legal name; date of birth; complete street address of principal residence (P.O. Box is not permitted); unique identifying number from current valid driver’s license or passport; and a PDF, PNG, or JPG/JPEG image of the owner’s current valid driver’s license.
If the company was formed in 2024 or later, it must report the information for those individuals who assisted in its formation (“Company Applicant”). The same information is required for the Beneficial Owner and the Company Applicant.
How and Where Do Companies Report?
FinCEN began accepting BOI reports electronically through its secure filing system on January 1, 2024. If the company existed before January 1, 2024, it must file its initial BOI report by January 1, 2025. If the company is created or registered to do business in the United States on or after January 1, 2024, and before January 1, 2025, it will have 90 calendar days after receiving actual or public notice that its creation or registration was effective. If the company is created or registered on or after January 1, 2025, it will have 30 calendar days from its actual or public notice that its creation or registration was effective.
The company will be able to register on FinCEN’s website and can get more guidance at https://www.fincen.gov/boi.
Can the Government Require A Company to Report this Information?
The biggest question about the CTA is whether it is constitutional. The United States District Court for the District of Alabama ruled that it is not. The judge overseeing the proceedings concluded that the CTA “exceed[ed] 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.”[7]
For purposes of this article, the complexities and rationale behind the decision will not be discussed. The consequences of this decision are still uncertain. What is certain, however, is that while one court’s ruling declared the CTA unconstitutional, that ruling only applies to entities registered in Alabama. The CTA will remain enforceable in every other state and U.S. territory while it moves through the 11th Circuit Court of Appeals and potentially to the United States Supreme Court.
Next Steps
The breadth of the CTA could not be covered entirely in this article. This article is meant to serve as a primer to help businesses understand the CTA and point them to the resources they will need to comply with this new law.
The CTA should be on every company’s radar, whether big or small. Companies should check with their legal teams or find competent counsel to help walk them through the nuances of the CTA to ensure compliance with the CTA.
For more information on complying with the CTA, businesses can visit FinCEN’s website at https://www.fincen.gov/boi or find the compliance guide FinCEN has provided nationwide at https://www.finc. en.gov/boi/small-entity-compliance-guide.
[1] FinCEN is an existing arm of the U.S. Treasury Department. It is an acronym for Financial Crimes Enforcement Network, an agency that prosecutes financial crimes, supports law enforcement investigation, and promotes global cooperation against financial crimes.
[2] Read the Act here: https://www.fincen.gov/sites/default/files/shared/Corporate_Transparency_Act.pdf.
[3] See https://www.fincen.gov/boi/small-entity-compliance-guide.
[4] See generally 31 U.S.C. § 5336.
[5] See 31 U.S.C. § 5336(a)(3)(a).
[6] See 31 U.S.C. § 5336(a)(3)(b).
[7] See Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. Mar. 1, 2024), see also https://www.fincen.gov/news/news-releases/updated-notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448.
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