The Corporate Transparency Act (“CTA”) became law on January 1, 2021, and implementation became effective January 1, 2024. The CTA created broad reporting requirements that apply to LLCs, limited partnerships (LPs) and other types of entities, a reporting company. There are also many entities that are exempt from reporting.
Reporting companies are required to disclose to the U.S. Financial Crimes Enforcement Network (FinCEN) the name, residential address, date of birth and unique identification number from an acceptable identification document (e.g., a driver’s license or passport) of all significant owners and persons who may exercise control over the reporting company, the beneficial owners.
Who Is a Beneficial Owner?
FinCEN defines a beneficial owner as any individual who, directly or indirectly exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the reporting company. FinCEN states that substantial control can be exercised in four ways: 1) senior officer 2) authority to appoint or remove senior officers 3) important decision maker and 4) an individual who has any other form of substantial control and they direct you to their Small Entity Compliance Guide for more clarity regarding number 4.
Do Trusts with LLC/LP Interests Have a Filing Requirement?
If a trust owns 25% or more of a reporting company, or exercises substantial control over a reporting company, it must then be determined who the beneficial owners of the trust are, and the trust beneficial owners must be included on the filing for the reporting company. It is not the trust/trustee’s responsibility to file; it is the entity’s responsibility to file.
The Good News
The reportable information is not public information, though FinCEN can disclose information to certain federal or state agencies engaged in national security, intelligence, or law enforcement activity. There is no cost to file with FinCEN, and reporting is not an annual requirement, though information must be updated within 30 days of any change.
The Bad News
The penalty for failure to file is draconian, up to $500/day, with the maximum fine not to exceed $10,000, a prison term of up to two years or both.
Deadlines
Reporting companies formed prior to 2024 must file by January 1, 2025.
Reporting companies formed in 2024 must file 90 days after formation (some may be past this deadline).
Reporting companies formed in 2025 or later must file 30 days after formation.
The FinCEN website has a lot of helpful information:
https://www.fincen.gov/sites/default/files/shared/BOI-FAQs-QA-508C.pdf
https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
But Wait! There was a Preliminary Injunction at the Eleventh Hour
On December 3, a judge in the Eastern District of Texas issued a national preliminary injunction against the CTA, prohibiting its enforcement, stating that “reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”
A few things to keep in mind: 1) The US government filed an appeal on December 5, 2) FinCEN issued an Alert in response to the ruling stating “while this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.” 3) This is not the only case that has been brought claiming that the CTA is unconstitutional, two other district courts have already rejected requests for a preliminary injunction (one in Virginia and one in Oregon) meaning two other judges were not convinced of the unconstitutionality of the CTA, while one court in Alabama has been successful in challenging the CTA, but that case was state specific. So, while this may be welcome news, it does not necessarily mean it is the end of the CTA as we know it. The injunction is preliminary and temporary until further notice, so anyone with a filing requirement should remain ready to meet the filing requirements should the injunction be lifted, and always should seek the guidance of their attorney as to the best way to move forward.
