UPDATE 4/25/2024:
In March 2024, a U.S. District Court judge in Alabama held that the Corporate Transparency Act was unconstitutional in an opinion ruling on a motion for summary judgment. The ruling was critical of Congress’s choices in constructing the Act, but not of its aims. The Court discussed Congress’s failure to narrow the Act’s effect to only companies that participate in interstate commerce or to indicate how merely forming an entity with state or tribalauthorities affects interstate commerce. Nat’l Small Bus. United v. Yellen, No. 5:22-CV-1448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024).
Because the findings came in the ruling on a motion for summary judgment, the Court merely concluded that the plaintiffs were entitled to summary judgment as a matter of law, and stated that a final judgment was forthcoming. Additionally, Federal District Court Rulings are not binding on other Districts or Circuits, so there is no immediate effect on the broader public, but the ruling has been appealed to the Eleventh Circuit Court of Appeals by the defendants where a ruling would be binding on the Districts of which it is composed. Ultimately, as this is a case of national importance, regardless of the Eleventh Circuit’s ruling the case will be appealed to the U.S. Supreme Court for the final say, which was the likely intent of the plaintiffs in the matter.
On March 20th, the Acting Director of the Financial Crimes Enforcement Network (FinCEN), the Secretary of the U.S. Treasury Department, and the U.S. Department of the Treasury (the defendants in the case) filed a Motion to Expedite with the Eleventh Circuit to speed the process of an opinion. An expedited process would mean shorter deadlines for briefs from the parties and a hearing that would be far sooner than if the case were not expedited. As of publication, this motion is still pending, and the defendants have an April 22nd deadline for their Appellants’ brief. Once that brief is filed, the opposing side will have 30 days to respond, and then the government will have 21 days to file a reply brief if it chooses.
While a ruling declaring the CTA unconstitutional as applied to businesses generally, not just the parties to the case in Alabama, might appear in time to obviate the need for companies to complete the filings required by the CTA, there can be no guarantee that appellate courts will rule in that direction or before the CTA filing deadline. Accordingly, Ziliak Law advises all clients who are subject to CTA filing obligations to satisfy those on time despite the Alabama holding, until there is clear direction from the courts on the necessity of CTA registration. We believe that this is necessary as the ruling lays out a clear signal to Congress of the small changes it would take to rehabilitate the CTA so that it could withstand judicial scrutiny.
It is possible that either the government will draft better arguments on appeal or Congress will take the judge’s cue to modify the law before a ruling comes down. It is also important to note that the only part of the CTA thus far held unconstitutional is the requirement to register, with no parallel challenge to the part that creates a database with FinCEN. Because the database for beneficial ownership information would be left in place, Congress could revive the mandate to register with a more constitutionally acceptable manner of determining when the mandate triggers as opposed to mere registration.
ORIGINALLY PUBLISHED 1/8/2024
Part of the Anti-Money Laundering Act of 2020, enacted by Congress in 2021, is the Corporate Transparency Act (CTA)[1]. The CTA is intended to enhance the transparency of corporate entities to combat money laundering and other types of fraud by creating a federal database of companies that are not already registered with the government through previous acts such as the Securities Exchange Act and other federal regulations.
The CTA requires the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to start and maintain a registry of “reporting companies” and their “beneficial owners.”[2]
Reporting companies are defined in the CTA as any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.[3] The act contains numerous exceptions to what types of entities are reporting companies under the CTA. The largest exception is for entities that (1) employ more than twenty employees; (2) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (3) have an operating presence at a physical office within the United States.[4] Other exceptions include most companies that are already required to and have registered under separate federal regulations including the Securities Exchange Act, the Federal Credit Union Act, the Sarbanes-Oxley Act, and the like.[5]
The CTA requires information from all beneficial owners and company applicants. The CTA defines a beneficial ownerof an entity as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25 percent equity in the entity.[6] Beneficial owners do not include (1) a minor child (as long as the child’s parent’s or guardian’s information is reported); (2) an individual acting as an intermediary or agent on behalf of another; (3) a person whose control over a reporting company derives solely from their employment; (4) an individual whose only interest in a reporting company is through a right of inheritance; or (5) a creditor of a reporting company (unless they qualify as a “beneficial owner” through substantial control or equity ownership).[7]
An applicant is defined, under the CTA, as an individual who files an application to form an entity or registers or files an application to register an entity to do business in the U.S. by filing a document with a secretary of state.[8] Reporting companies existing prior to January 1, 2024 are not required to report information on company applicants.[9]
Substantial Control over a reporting company is defined in four different ways. If the individual falls into any of the categories below, the individual is exercising substantial control:
- The individual is a senior officer (the company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function).
- The individual has authority to appoint or remove certain officers or a majority of directors (or members of a similar body) of the reporting company.
- The individual is an important decision-maker for the reporting company. Important decisions include decisions about a reporting company’s business, finances, and structure. An individual that directs, determines, or has substantial influence over these important decisions exercises substantial control over a reporting company.
- The individual has any other form of substantial control over the reporting company as explained further in FinCEN’s Small Entity Compliance Guide. Control exercised in new and unique ways can still be substantial. For example, flexible corporate structures may have different indicators of control than the indicators included.[10]
Required Information: From each beneficial owner and company applicant…
Reporting Company:
- full legal name of reporting company,
- any trade name or “doing business as” name,
- current address of the principal place of business (if there is one) or the primary location in the U.S. where the company conducts business,
- the state, tribal, or foreign jurisdiction of formation,
- for a foreign reporting company, the state or tribal jurisdiction where such company first registers, and
- IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.[11]
Beneficial owners and company applicants:
- full legal name,
- date of birth,
- current residential address for individual owners or the business address for a company applicant’s business,
- a unique identifying number from an acceptable identification document (such as a non-expired passport or state-issued identification document), and
- an image of the document from which the unique identifying number was obtained.[12]
When: All domestic entities created before January 1, 2024, and any entity that became a foreign reporting company before January 1, 2024, must file their initial BOI Reports with FinCEN by January 1, 2025.[13]
All domestic entities formed on or after January 1, 2024, and before January 1, 2025, and any entity that became a foreign reporting company on or after January 1, 2024, and before January 1, 2025, have 90 days to file their initial BOI Reports.[14]
All domestic entities formed on or after January 1, 2025, and any entity that became a foreign reporting company on or after January 1, 2025, have 30 days to file their initial BOI Reports.[15]
These deadlines run from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of the company’s creation or registration, whichever is earlier.[16]
By the letter of the regulation, if your company previously qualified for an exemption to the reporting company definition but no longer qualifies, you are required to file a BOI report within 30 calendar days of the date on which your company stops qualifying for the exemption.[17] That said, a strict reading of that rule would require a company formed after January 1, 2024 to file earlier if it previously qualified for an exemption than if it never qualified for an exemption. It seems likely that FinCEN will actually require filings in this circumstance by the later of (a) thirty days after the exemption ceases to apply and (b) the date on which filing would have been due for the company if not for this paragraph.
After their initial report, companies are further required to update their information within 30 calendar days of any change to update any of the required information previously submitted, including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner. Death of a beneficial owner, a change to exemption status, a minor child whose parent of legal guardian’s information was reported in their stead that attains the age of majority, and a change to any information on an identifying document are all changes that necessitate an updated report.[18]
PENALTIES: Willfully providing or attempting to provide false or fraudulent information to FinCEN or failing to report or update complete beneficial ownership information to FinCEN can result in fines up to $10,000 and imprisonment for up to two years.[19] If the person who submitted a report with inaccurate information voluntarily and promptly corrects the report within 90 days of the inaccurate filing and 30 days of becoming aware of the inaccuracy, they can avoid civil and criminal liability.[20]
Full List of Exemptions to Reporting Companies[21]:
(i)an issuer—
(I)of a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
(II)that is required to file supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d));
(ii)an entity—
(I)established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State, or under an interstate compact between 2 or more States; and
(II)that exercises governmental authority on behalf of the United States or any such Indian Tribe, State, or political subdivision;
(iii)a bank, as defined in—
(I)section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813);
(II)section 2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a)); or
(III)section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a));
(iv)a Federal credit union or a State credit union (as those terms are defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752));
(v)a bank holding company (as defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841)) or a savings and loan holding company (as defined in section 10(a) of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)));
(vi)a money transmitting business registered with the Secretary of the Treasury under 31 U.S.C. § 5330;
(vii)a broker or dealer (as those terms are defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)) that is registered under section 15 of that Act (15 U.S.C. 78o);
(viii)an exchange or clearing agency (as those terms are defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)) that is registered under section 6 or 17A of that Act (15 U.S.C. 78f, 78q–1);
(ix)any other entity not described in clause (i), (vii), or (viii) that is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.);
(x)an entity that—
(I)is an investment company (as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3)) or an investment adviser (as defined in section 202 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2)); and
(II)is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.) or the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.);
(xi)an investment adviser—
(I)described in section 203(l) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3(l)); and
(II)that has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the Securities and Exchange Commission;
(xii)an insurance company (as defined in section 2 of the Investment Company Act of 1940 (15 U.S.C. 80a–2));
(xiii)an entity that—
(I)is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State; and
(II)has an operating presence at a physical office within the United States;
(xiv)
(I)a registered entity (as defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a)); or
(II)an entity that is—
(aa)
(AA)a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor (as those terms are defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a)); or
(BB)a retail foreign exchange dealer, as described in section 2(c)(2)(B) of that Act (7 U.S.C. 2(c)(2)(B)); and
(bb)registered with the Commodity Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.);
(xv)a public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7212);
(xvi)a public utility that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States;
(xvii)a financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5463);
(xviii)any pooled investment vehicle that is operated or advised by a person described in clause (iii), (iv), (vii), (x), or (xi);
(xix)any—
(I)organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) of such Code) and exempt from tax under section 501(a) of such Code, except that in the case of any such organization that loses an exemption from tax, such organization shall be considered to be continued to be described in this subclause for the 180-day period beginning on the date of the loss of such tax-exempt status;
(II)political organization (as defined in section 527(e)(1) of such Code) that is exempt from tax under section 527(a) of such Code; or
(III)trust described in paragraph (1) or (2) of section 4947(a) of such Code;
(xx)any corporation, limited liability company, or other similar entity that—
(I)operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in clause (xix);
(II)is a United States person;
(III)is beneficially owned or controlled exclusively by 1 or more United States persons that are United States citizens or lawfully admitted for permanent residence; and
(IV)derives at least a majority of its funding or revenue from 1 or more United States persons that are United States citizens or lawfully admitted for permanent residence;
(xxi)any entity that—
(I)employs more than 20 employees on a full-time basis in the United States;
(II)filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of—
(aa)other entities owned by the entity; and
(bb)other entities through which the entity operates; and
(III)has an operating presence at a physical office within the United States;
(xxii)any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by 1 or more entities described in clause (i), (ii), (iii), (iv), (v), (vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi), (xvii), (xix), or (xxi);
(xxiii)any corporation, limited liability company, or other similar entity—
(I)in existence for over 1 year;
(II)that is not engaged in active business;
(III)that is not owned, directly or indirectly, by a foreign person;
(IV)that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000 (including all funds sent to or received from any source through a financial account or accounts in which the entity, or an affiliate of the entity, maintains an interest); and
(V)that does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity; and
(xxiv)any entity or class of entities that the Secretary of the Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has, by regulation, determined should be exempt from the requirements of 31 U.S.C. § 5336(b) because requiring beneficial ownership information from the entity or class of entities—
(I)would not serve the public interest; and
(II)would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.
Article by Tony Dunlap Jr.
[1] 31 U.S.C. § 5336; https://www.law.cornell.edu/uscode/text/31/5336
[3] 31 U.S.C. § 5336(a)(11)(A); 31 C.F.R. 1010.380(c)(1)
[4] 31 U.S.C. § 5336(a)(11)(B)(xxi); 31 C.F.R. 1010.380(c)(2)(xxi)
[5] 31 U.S.C. § 5336(a)(11)(B); 31 C.F.R. 1010.380(c)(2)
[6] 31 U.S.C. § 5336(a)(3)(A); 31 C.F.R 1010.380(d)(2)
[7] 31 U.S.C. § 5336(a)(3)(B); 31 C.F.R. 1010.380(d)(3)
[9] 31 C.F.R. 1010.380(b)(2)(iv)
[11] 31 C.F.R. 1010.380(b)(1)(i)
[12] 31 C.F.R. 1010.380(b)(1)(ii)
[13] 31 C.F.R. 1010.380(a)(1)(iii)
[14] 88 Fed. Reg. 83,499 (Nov. 30, 2023) (to be codified at 31 C.F.R. 1010.380(a)(1))
[17] 31 C.F.R. 1010.380(a)(1)(iv)
[19] 31 U.S.C. § 5336(h)(1), (3)
[20] 31 U.S.C. § 5336(h)(3)(C); 31 C.F.R. 1010.380(b)(4)(iii)(A)(2)
[21] 31 U.S.C. § 5336(a)(11)(B); 31 C.F.R. 1010.380(c)(2)