In January 2021, Congress enacted the Corporate Transparency ACT (“CTA”), requiring certain companies to file reports that contain basic information about the company and its “beneficial owners” with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). This new law goes into effect on January 1, 2024.

Companies formed before 2024 will have until January 1, 2025 to file their reports. Companies formed in or after 2024 must comply with the CTA within 30 calendar days of creation.

The CTA requires “reporting companies” to report the “beneficial owner information” (“BOI”) for each of its beneficial owners. A “reporting company” is defined as any corporation, LLC, or similar entity that is either created by filing a formation document with a secretary of state or similar office, or formed under the law of a foreign country and registered to do business in the United States.

The CTA defines a “beneficial owner” as an individual who, directly or indirectly, exercises substantial control over the entity, or owns or controls not less than 25% of the ownership interests of the entity.

Reporting companies must report to FinCEN the following information regarding each of its beneficial owners: (1) full legal name, (2) date of birth, (3) residential or business street address, and (4) unique identifying number from an acceptable identification document or FinCEN identifier in accordance with separate requirements. The information will not be made public, but it will be available to federal, state and local agencies for specific purposes.

A reporting company must also provide its legal name and any trade name or dba, its address, the jurisdiction in which it was formed or first registered, and its taxpayer identification number.

For reporting companies formed in or after 2024, the BOI of the “company applicant” must also be reported. The company applicant is defined as the person who files the document that creates the reporting company and the person who is responsible for directing or controlling the filing (if there are multiple people).

The CTA exempts 23 types of companies from the reporting requirements. Notably, “large operating companies” that employ more than 20 employees on a full-time basis in the United States, have an operating presence at a physical office in the United States, and generate more than $5 million in annual gross receipts or sales are exempt from the CTA’s reporting requirements. Here’s a full list of the 23 types of exempted entities:

1. 1. Certain types of securities reporting issuers.
   2. A U.S. governmental authority.
   3. Certain types of banks.
   4. Federal or state credit unions as defined in section 101 of the Federal Credit Union Act.
   5. bank holding company as defined in section 2 of the Bank Holding Company Act of 1956, or any savings and loan holding company as defined in section 10(a) of the Home Owners’ Loan Act.
   6. Certain types of money transmitting or money services businesses.
   7. Any broker or dealer, as defined in section 3 of the Securities Exchange Act of 1934, that is registered under section 15 of that Act (15 U.S.C. 78o).
   8. Securities exchanges or clearing agencies as defined in section 3 of the Securities Exchange Act of 1934, and that is registered under sections 6 or 17A of that Act.
   9. Certain other types of entities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
   10. Certain types of investment companies as defined in section 3 of the Investment Company Act of 1940, or investment advisers as defined in section 202 of the Investment Advisers Act of 1940.
   11. Certain types of venture capital fund advisers.
   12. Insurance companies defined in section 2 of the Investment Company Act of 1940.
   13. State-licensed insurance producers with an operating presence at a physical office within the United States, and authorized by a State, and subject to supervision by a State’s insurance commissioner or a similar official or agency.
   14. Commodity Exchange Act registered entities.
   15. Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002.
   16. Certain types of regulated public utilities.
   17. Any financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
   18. Certain pooled investment vehicles.
   19. Certain types of tax-exempt entities.
   20. Entities assisting a tax-exempt entity described in (xix) above.
   21. Large operating companies with more than 20 full-time employees, more than $5,000,000 in gross receipts or sales, and an operating presence at a physical office within the United States.
   22. The subsidiaries of certain exempt entities.
   23. Certain types of inactive entities that were in existence on or before January 1, 2021, the date the Corporate Transparency Act was enacted.

The CTA creates several penalties for noncompliance. For each day of noncompliance, businesses will face a $500 penalty, up to $10,000. Failure to report can also lead to up to two years of imprisonment.

Things to look out for:

• Complex definition scheme – Attorneys and clients must know who a “beneficial owner” is and what it means to have “substantial control” over a reporting company.
• Timing of formation – Business owners thinking of creating a new subsidiary or affiliate might want to accelerate their timeline in order to delay reporting requirements under the CTA.
• Awareness – Most small businesses do not have a compliance team or staff attorneys. There are potential penalties for not abiding by the CTA, so it is imperative to inform business owners of the new regulatory scheme.

Future of the CTA

The CTA is currently being challenged in federal court on constitutionality concerns. National Small Business United has sued the government, alleging that the act is unconstitutionally vague, compels speech, and outside the scope of the powers granted to the federal government by the Constitution. The Government argues that no such violations exist under the CTA, and that in the alternative, the Government’s interest in national security outweighs the alleged violations of the 1^st and 4^th Amendment.

National Small Business United’s claim that the CTA is unconstitutionally vague raises a concern about the clarity and specificity of the law. The vagueness doctrine requires that laws be clear enough for individuals and entities to understand what conduct is prohibited or required. If the CTA’s requirements are unclear or ambiguous, it might lead to arbitrary enforcement and hinder individuals from knowing how to comply.

The challenge based on the scope of federal powers granted by the Constitution brings up issues related to federalism and the division of powers between the federal government and the states. The Constitution outlines specific powers granted to the federal government, and any law that goes beyond those enumerated powers could be challenged as unconstitutional under the Tenth Amendment. The court will need to determine whether the law’s objectives and provisions fall within the federal government’s authority.

The deadline for these filings will be here before you know it. If you have any questions, whether you or your company must file a report or instead is exempt or how to comply with the law, please contact us. The penalty for noncompliance can be devastating to the small businesses that the CTA targets.