Purpose of the law:

The Corporate Transparency Act (CTA), passed by Congress as part of the Anti-Money Laundering Act of 2020, became effective on January 01, 2024, and aims to combat crimes such as money laundering, tax evasion, and other illegal activity. https://www.govinfo.gov/content/pkg/USCODE-2021-title31/pdf/USCODE-2021-title31-subtitleIV-chap53-subchapII-sec5336.pdf

To do so, it requires certain business entities to report "Beneficial Ownership Information" ("BOI") and other information to the Financial Crimes Enforcement Network ("FinCEN") – a division of the U.S. Department of the Treasury.

The Importance of Compliance:

Noncompliance can lead to civil fines of up to $500/day and criminal penalties of up to $10K or prison for up to two years.

Entities required to report:

The business entities (domestic and foreign) required to report include:

• Corporations
• Limited Liability Companies (LLCs)
• Limited Partnerships (LPs)
• Limited Liability Partnerships (LLPs)
• Other entities – those created by filing a document with a secretary of state or similar office (ex. a statutory trust)

If a business ("Reporting Company") must report, the information will include details about the business and its "beneficial owners" – an individual with "substantial control" over the business or an individual who owns or controls at least 25 percent of the business.

Here is a non-exhaustive list of who is a "beneficial owner" with "substantial control" over the business:

• A "senior officer" - a person "exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function" 
• A member of the board of directors
• An individual with authority to appoint or remove a majority of board of directors
• An individual who "directs, determines or has substantial influence over important decisions"
• An individual who exercises "any other form of substantial control"
• An individual exercising indirect control through: ownership or control of a majority of the voting power; control over "one or more intermediary entities that … exercise substantial control over" the company; and "arrangements or financial or business relationships, whether formal or informal".

There are 23 listed exemptions from compliance. Some apply to regulated businesses such as banks, public companies, licensed insurance companies, and tax-exempt nonprofits. Some large companies may be exempt if they have at least 20 full-time employees and greater than $5M in gross receipts from the prior fiscal year.

Three items that must be reported:

1. Specific beneficial ownership information, including:

• Full name, date of birth, and current residential street address of the beneficial owner

• ID number and jurisdiction of issuance for one of the following:
  • U.S. passport,
  • State, local, or Indian tribal identification document, or
  • State-issued driver's license; and
  • Image of the document from which the ID number was obtained.

If the individual has none of the above listed documents, a passport issued to them by a foreign government will be accepted.

2. Information about who created the entity or registered it to do business in the United States, and
3. Any change to previously reported information within a specified time period.

In addition to BOI, the Reporting Company must disclose the following information:

1. Full legal name of the entity;
2. Any trade names, doing business as (d/b/a), or trading as (t/a) names through which it conducts business;
3. The entity's complete current address of its principal place of business in the U.S.;
4. State, tribal, or foreign jurisdiction of formation; and
5. The entity's federal employer identification number (EIN), or federal individual taxpayer identification number (ITIN), or if these are not available, the taxpayer identification number from a foreign jurisdiction and the name of such jurisdiction.

Reporting Deadlines:

There are different reporting deadlines depending on when the business ("Reporting Company") was formed or registered.

For example, a domestic "Reporting Company" (an entity created before January 01, 2024, or an entity that became a foreign Reporting Company before January 01, 2024) is required to file the report with FinCEN no later than January 01, 2025.

And, for those domestic and foreign Reporting Companies created after January 01, 2024, file the report within thirty (30) calendar days after receipt of notice of creation (domestic Reporting Companies) or registration to do business in the U.S. (foreign Reporting Companies).

Current Status of the CTA:

On March 01, 2024, an Alabama federal judge ruled that the CTA is unconstitutional as exceeding the Constitution's limits on Congress' power. The ruling enjoined FinCEN and the U.S. Department of Treasury from enforcing the CTA, but only as against the plaintiffs. National Small Business United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala.) https://s-corp.org/wp-content/uploads/2024/03/051.-Memorandum-Opinion.pdf

The Justice Department filed a Notice of Appeal on March 11, 2024, Appeal No. 24-10736-J, in the U.S. Court of Appeals for the Eleventh Circuit. https://www.fincen.gov/sites/default/files/shared/54_Notice_of_Appeal.pdf

While the appeal is pending, the CTA will continue to be enforced against all other entities, except the plaintiffs in the Alabama lawsuit, who will not be required to report BOI at this time.

The plaintiffs are Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members (as of March 01, 2024) of the National Small Business Association.

Bottom Line:

Work with your legal counsel to determine if your organization is a "Reporting Company" or is exempt; who are the "beneficial owners"; and how to timely comply with the CTA's requirements.

Designate a person responsible for compliance with the Act.

Make sure your policies and procedures allow for collecting and reporting of required information, as well as for flagging any changes in information previously reported.