OVERVIEW
On January 1, 2024, Congress’ Corporate Transparency Act (“CTA”) went into effect. According to Congress, the purpose of the CTA is to combat financial crimes like money laundering and tax fraud by enhancing transparency in the ownership structures of U.S. entities. The law requires certain companies to report beneficial ownership information (“BOI”) to the U.S. Dept. of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) for the purpose of targeting the individuals behind shell companies and other opaque business structures.
WHAT IS BENEFICIAL OWNERSHIP
Under the CTA, a “beneficial owner” is identified as an individual who directly or indirectly exercises significant control over, or owns, at least 25% of the ownership interests in a reporting company. This definition aims to ensure that the true owners of companies cannot remain hidden behind layers of corporate structures.
But it’s not just the actual owners who must identify themselves under the CTA. As is explained below, even those who helped form the company (e.g., lawyers and paralegals at corporate law firms) must identify themselves.
REPORTING REQUIREMENTS
The CTA mandates that both domestic and foreign entities engaged in business in the U.S. report their beneficial owners to FinCEN. This includes corporations, limited liability companies, and other entities created by filing a document with a secretary of state or similar office (e.g., limited liability partnerships). There are 23 different types of entities exempt from the CTA, all of which are identified more specifically below.
Companies are required to file reports that include detailed information about their beneficial owners, such as names, addresses, birth dates, and identification numbers. Additionally, entities created or registered to do business in the U.S. after January 1, 2024, must also report up to two “company applicants” involved in their formation or registration.
In addition to including information about the beneficial owners, the CTA requires every shareholder to provide a jpg or PDF of their driver’s license (or a passport if no license is available).
Timing wise, it seems that the federal government believes that business owners all over the country are aware of the new law because the CTA requires that all pre-existing LLCs and corporations—i.e., those formed prior to January 1, 2024—submit the BOI report before January 1, 2025, while all non-exempt entities formed after January 1, 2024 must complete the report within 90 days of formation. And after January 1, 2025, new companies will only have 30 days to complete the report.
PENALTIES FOR NON-COMPLIANCE
The CTA not only imposes rather severe civil and criminal penalties for submitting false or fraudulent information, but also for failure to comply with the BOI reporting requirements. To be sure, the penalties for willful failure to comply with the BOI reporting requirements include: (i) $500 per day of non-compliance; (ii) penalties of up to $10,000; and (iii) up to two years in prison.
The criminalization of what could amount to simple negligence is troubling, and the argument that only intentional failure is punishable is not convincing because what constitutes intentional is remarkably fluid, depending on who the defendant is. In other words, there’s a lot of room for abuse in such decisions.
EXEMPTIONS
The CTA includes 23 separate exemptions for the following types of companies, all of which are generally already subject to regulatory oversight or transparency requirements:
| 1. | Securities reporting issuer |
| 2. | Governmental authority |
| 3. | Bank |
| 4. | Credit union |
| 5. | Depository institution holding company |
| 6. | Money services business |
| 7. | Broker or dealer in securities |
| 8. | Securities exchange or clearing agency |
| 9. | Other Exchange Act registered entity |
| 10. | Investment company or investment adviser |
| 11. | Venture capital fund adviser |
| 12. | Insurance company |
| 13. | State-licensed insurance producer |
| 14. | Publicly traded company |
| 15. | Accounting firm |
| 16. | Public utility |
| 17. | Financial market utility |
| 18. | Pooled investment vehicle |
| 19. | Tax-exempt entity |
| 20. | Entity assisting a tax-exempt entity |
| 21. | Large operating company* |
| 22. | Subsidiary of certain exempt entities |
| 23. |
Inactive entity |
These exemptions purportedly focus the CTA’s reporting requirements on entities that are more likely to be used to conceal ownership for the purposes of illicit activities by excluding entities that are already subject to significant regulatory oversight or that operate in a manner that naturally provides for transparency of ownership.
* To qualify as a large operating company under the CTA exemption, a company has to employ at least 20 full-time employees in the United States, have offices in the United States, and must show at least $5 million in gross receipts/sales on its taxes from the prior year.
LEGAL CHALLENGES
The CTA has faced legal challenges regarding its constitutionality. In a notable case, National Small Business United v. Yellen, a federal district court in Alabama ruled the CTA unconstitutional, arguing it exceeded Congress’s power by imposing undue burdens on small businesses. This ruling, however, specifically prohibits the enforcement of the CTA against the plaintiffs of the case, not universally across the U.S. The Department of the Treasury and FinCEN are not enforcing the CTA against the plaintiffs but have appealed the ruling, and the CTA’s broader application remains in effect outside of this injunction.
CONCLUDING THOUGHTS
This ongoing legal battle underscores the contentious nature of the CTA and its impact on small businesses, highlighting the balance between national security interests and the regulatory burdens placed on businesses. As legal proceedings continue, the future of the CTA’s enforcement and its implications for U.S. businesses remain uncertain.