What the Corporate Transparency Act and its Recent Legal Developments Mean for Your Business
What is the Corporate Transparency Act (CTA)?
The Corporate Transparency Act (CTA) was a part of a much larger raft of bills that became law in 2021. As of January 1st, 2024, a vital component of the CTA became active, the Beneficial Ownership Information (BOI) reporting rule. This rule means that all qualifying organizations must report partners with an ownership stake in a business. This piece of compliance is part of a larger effort of the U.S. Government to stem the flow of illicit funds and money laundering formed in part by shell companies and other shady business practices that allow for so-called “dark money” to flow freely.
This post will review the critical reporting components of the new law, as well as a recent legal decision from a federal court in Alabama.
Learn more: The Corporate Transparency Act
What is Beneficial Ownership Information reporting, and who does it apply to?
Beneficial Ownership Information reports list identifying data about people who control a company, either directly or indirectly. Under the new law, this information must be reported to FinCEN (the Financial Crimes Enforcement Network), a branch of the United States Treasury Department that combats financial crime.
Who must file?
FinCEN identifies two types of organizations that fall under the jurisdiction of this law:
- Domestic reporting companies are corporations, LLCs, and other business entities that have been formed and are doing business in the U.S.
- Foreign reporting companies are based in foreign nations registered to do business in the United States.
FinCEN defines a beneficial owner as “an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests”. These individuals must all be reported as beneficial owners. FinCEN further classifies owners as:
- Senior officers such as the organization’s president, CEO, or similar leadership functions.
- Important company decision-makers.
- Individuals who can appoint or remove senior officers.
- Individuals with an ownership interest, such as equity, stock, voting rights, or other ownership privileges.
Exemptions
Many organizations are exempt from reporting. FinCEN lists 23 exempt entity types, including banks, credit unions, public utilities, tax-exempt organizations like non-profits, and some securities organizations.
Five types of owners are exempt from BOI reporting:
- Minors
- Intermediaries
- Non-owner employees
- Future inheritors of ownership
- Creditors
Note that once a future inheritor inherits an ownership stake, they are no longer exempt from reporting. Additionally, lawyers and accountants are generally only considered owners if they hold equity, a position as a senior officer, or another qualifying ownership stake.
When to file
The deadline for filing your company’s beneficial ownership information report depends on when exactly the company was or will be registered:
- Before January 1st, 2024: An organization must file BOI by January 1st, 2025.
- During 2024: A company has 90 days after registration to file BOI.
- 2025 and beyond: Companies must file BOI within 30 days.
How to file?
Organizations may file BOI reporting online by visiting FinCEN’s website. It is completely free to file.
The information related to beneficial ownership reported to FinCEN is kept in a highly secure and confidential database, utilizing robust information security methods and controls that the federal government commonly employs to safeguard sensitive information systems of the highest security level available to non-classified data.
Also read: The Basics of Zero Trust Implementation
Penalties for not filing
BOI reporting is a new form of compliance, and some leeway can be expected during initial implementation, especially for accidental noncompliance. However, willful violators could face stiff penalties, including civil fines of up to $500 per noncompliant day, or criminal punishments, including jail time.
The Alabama federal court ruling
On March 1, 2024, a federal judge in the U.S. District Court for the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional. The Treasury and FinCEN are expected to appeal the ruling, and other courts are not bound by the Northern District of Alabama’s decision. However, members of the plaintiff organization (the National Small Business Association), inside and outside of northern Alabama, are not subject to CTA compliance or enforcement.
FinCEN commented “FinCEN will comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.”
What does this mean for your business?
This decision introduces a lot of uncertainty around the new compliance rules. However, it is not binding to other plaintiffs or organizations outside Alabama. The Treasury Department will surely appeal the ruling. In the meantime, it’s best to err on the side of caution and follow the compliance rules as written—report as you would if there was no legal ruling.
Check back to this blog post for updates as the story develops over the coming months.
Your trusted compliance advisors
For more than 15 years, McGowan PRO has been assisting professionals and the organizations they represent to navigate the complex landscape of compliance. Whether you have an existing compliance team or not, our team can offer guidance and support to ensure effective compliance management. With McGowanPRO, you can trust in our dependable recommendations that can help you safeguard your assets and maintain compliance with relevant regulations.