The Corporate Transparency Act (CTA) has been a significant topic of discussion and concern for many businesses since its enactment. Given recent legal challenges and the complexity of its requirements, we aim to address the main questions that businesses and their advisors have at this time.
- Is the CTA Still in Effect, Given the Lawsuits Seeking to Declare it Unconstitutional?
The CTA, enacted in 2021, mandates that many entities disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). However, on March 1, 2024, the U.S. District Court for the Northern District of Alabama declared the CTA unconstitutional, suspending its enforcement against the National Small Business Association (NSBA) and its members in the case National Small Business Association, et al. v. Yellen. The NSBA is an Ohio membership nonprofit corporation that represents and protects the rights of small businesses across the United States, including over 65,000 businesses and entrepreneurs located in all 50 states.
Despite this ruling, the CTA remains in effect for all other entities who are not members of the NSBA. The Department of Justice appealed the decision on March 11, and the outcome of this appeal could further impact the CTA’s enforcement.
There is currently at least one more pending lawsuit in which the plaintiffs seek to declare the CTA unconstitutional: Black Economic Council of Massachusetts, Inc., et al. v. Yellen, et al., No. 24-CV-11411, which was filed on May 29, 2024.
- Who Has to Report: The Business or Its Law Firm or Registered Agent?
The legal responsibility to report beneficial ownership information lies with the “reporting company,” which includes corporations, limited liability companies (LLCs), and other similar entities created or registered to do business in the U.S. Please refer to our earlier advisory for a more detailed discussion of who must report under the CTA. While law firms like ours or registered agents may assist in the filing process, the ultimate obligation to ensure compliance rests with the reporting company itself.
- Who Are the Beneficial Owners?
Under the CTA, a beneficial owner is defined as any individual who, directly or indirectly, either:
- Exercises substantial control over the reporting company, or
- Owns or controls at least 25% of the ownership interests of the reporting company .
Substantial control includes roles such as senior officers, individuals with authority over significant company decisions, and those who can influence the company’s major actions. Certain individuals, such as nominee directors, and employees acting solely in their employment capacity (except for some senior officers), are excluded from the definition of beneficial owners. Please refer to our earlier advisory for a more detailed discussion of what constitutes substantial control.
- Who Are the “Company Applicants”?
The CTA requires reporting companies created or registered on or after January 1, 2024, to disclose information about their “company applicants.” A company applicant is defined as:
- The individual who directly files the document that creates or registers the reporting company, and
- If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.
For example, if a law firm assists with the creation of a reporting company, this could mean that both the paralegal who files the incorporation documents and the attorney who oversees the filing process are considered company applicants. The regulations specify that there can be no more than two company applicants for any reporting company.
Reporting companies must provide detailed information about each company applicant, including their full legal name, date of birth, residential or business address, and a unique identifying number from a non-expired identification document such as a U.S. passport or state driver’s license. This information must be included in the initial BOI report filed with FinCEN.
It is important to note that once reported, a company applicant cannot be removed from the BOI report, even if they no longer have a relationship with the reporting company. However, updates to the BOI report are not required if there are changes to the information about a company applicant.
- What If I Make a Mistake? Can I Correct It?
If a reporting company makes an error in its beneficial ownership information report, it is required to file an updated report to correct the mistake. The CTA does not mandate annual reporting, but updates must be submitted whenever there is a change in the reported information, such as changes in beneficial owners or their details. Failure to correct inaccuracies can result in significant civil and criminal penalties, including fines and imprisonment.
Feel free to contact us for assistance with the filing to reduce the risk of making errors.
- Do Foreign Companies Need to Report Under the CTA?
Yes, foreign companies that are registered to do business in the United States are subject to the CTA’s reporting requirements. Specifically, a “foreign reporting company” is defined as any corporation, LLC, or other entity formed under the laws of a foreign country that is registered to do business in any U.S. state or tribal jurisdiction by filing a document with a secretary of state or similar office.
Foreign companies should carefully review their U.S. operations to determine their compliance obligations under the CTA and take necessary steps to ensure timely and accurate reporting.
- What Are the Deadlines?
The deadlines for filing beneficial ownership information reports under the CTA are as follows:
- Existing Companies: Entities created or registered before 2024 must file their initial reports by January 1, 2025. It may be advisable to abstain from reporting until closer to the end of the year and closely follow any developments on the matter in case the CTA’s enforcement is suspended before the deadline. Reporting companies are advised to factor in any possible technical difficulties associated with an increased volume of reports closer to the deadline.
- New Companies: Entities created or registered in 2024 must file their reports within 90 days of their creation or registration. Entities created or registered after 2024 will need to file their reports within 30 days of their creation or registration.
It is crucial for businesses to adhere to these deadlines to avoid penalties. Updates to the reports must be filed within 30 days of any change in the reported information.
Conclusion
The Corporate Transparency Act remains a critical compliance requirement for many businesses, despite ongoing legal challenges. Companies must ensure they understand their obligations under the CTA, identify their beneficial owners accurately, and adhere to the reporting deadlines to avoid penalties. For further assistance, businesses should consult with legal professionals to navigate the complexities of the CTA and ensure compliance.
The CommLaw Group can help!
Our clients are encouraged to determine whether the reporting requirements apply to them and prepare their filings in advance. Contact us if you need assistance in making the filings, and we will be happy to help you address this new compliance requirement!
Jonathan S. Marashlian – Tel: 703-714-1313 / E-mail: jsm@CommLawGroup.com
Michael Donahue — Tel: 703-714-1319 / E-mail: mpd@CommLawGroup.com
Diana James – Tel: 703-663-6757 / E-mail: daj@CommLawGroup.com
