All About the Corporate Transparency Act

In this installment, as promised in an earlier newsletter, we provide our detailed review of the Corporate Transparency Act (“CTA“).  If you own any portion of any business entity doing business in the United States, you may want to save this email for reference.   

As we “go to print,” this legislation is the subject of litigation.  Lower in this section you will learn about the Alabama Federal Court ruling — handed down just before this past weekend — that could stop or slow the CTA.  

What is the Corporate Transparency Act (CTA)?
The CTA is new legislation in effect as of January 1, 2024, that requires small businesses (i.e. “small entities”) to file a Beneficial Ownership Information Report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).  This is a new filing requirement for all “small entities” conducting business in the US (whether or not the business is registered/formed in the US or abroad).

We strongly advise every small business to review whether the CTA applies to them, and if it does, file your reports timely.  Reporting is mandatory.  Non-compliance with the CTA comes with severe potential penalties including fines of up to $10,000 and even jail time.

This is arguably the biggest development in business law this year.  

Who Is affected by the CTA?

All “small entities” are affected by the CTA.  A “small entity” is defined as basically any entity that is not otherwise listed on a public exchange, subject to some other exemptions (e.g. banks, investment advisors, accounting firms, public companies, inactive entities, tax-exempt entities, etc.). If you have an entity, and it is registered with any state government, you likely have to file.  For specific questions about your entity, please contact us. 

If my small entity is subject to the CTA, what do I have to report?
The CTA requires that the Reporting Company provide:

  1. The names and IDs of all “Beneficial Owners” of the Company (and, for any new entities created or registered on or after January 1, 2024, all “Company Applicants”).
  2. Information about the Reporting Company itself, including: full legal name, trade names, any registered and unregistered d/b/a, current address, and IRS TIN/EIN. 

Where do I have to report?
Effective January 1, 2024, the US Financial Crimes Enforcement Network’s (FinCEN) Beneficial Ownership Information (BOI) Reporting System went live.  It is located at Beneficial Ownership Information Reporting | FinCEN.gov and contains a lot of helpful information. 

If you are required to report your company’s beneficial ownership information to FinCEN, you will do so electronically through a secure filing system available via FinCEN’s BOI E-Filing website BOI E-FILING (fincen.gov).  You can download/upload a PDF or report directly through a website.   

It is not particularly difficult to file, however you must have a scan of the passport or other government issued ID for each beneficial owner being reported, which can become burdensome.

When is my reporting deadline?

If your business entity existed prior to January 1, 2024, you have a full year to file your report (prior to January 1, 2025). 

For any new entities formed this year (2024), you must file within 90 days.   

For any new entities formed after this year (starting January 1, 2025), you must file within 30 days.

I’ve heard about FinCEN IDs.  What is a FinCEN ID?
From FinCEN.gov a FinCEN ID is a unique identifying number issued to an individual by FinCEN.  There is no requirement to obtain a FinCEN ID in order to complete your CTA mandatory reporting.  However, having one can simplify the reporting process and minimize repetitive distribution personal information.  This may be particularly helpful with serial entrepreneurs or investors in multiple entities.  With a FinCEN ID, an individual beneficial owner or company applicant’s FinCEN ID can be reported instead of required information about that individual on the reporting company’s Beneficial Ownership Information Report (BOIR) submitted to FinCEN.

To register for a FinCEN ID, you will need to create an account with login.gov, and provide some personal information as well as a scan of a government approved identification. This process can be completed by following this link:  FinCEN ID | Financial Crimes Enforcement Network (FinCEN)

Kush obtained his FinCEN ID in about 15 minutes to complete and received his FinCEN ID immediately online.  My experience was the same.  

Our advice is that each individual —  whether you own some or all of 1 or 89 or more businesses — obtain a FinCEN ID so that you never have to send a PDF scan of your ID to third parties every time that party needs to include you on a report. You would just provide your FinCEN ID number!

Why did the United States create the CTA?
The United States created the CTA to combat fraud and financial crimes (e.g. money laundering). The US is actually one of very few countries that historically hasn’t tracked beneficial ownership of business entities.  This is an attempt to right that wrong and better track the direct and indirect ownership of business entities and who controls them in order to combat financial crimes.

The reporting will work all the way up the ownership chain. This is because the owner of a Company may also include another company. Each company up the chain must be reported until you arrive at the individuals who own 25% or more, or exercise substantial control, no matter how far up the ownership structure they may be.

But Wait…an Alabama Federal Judge Just Declared the CTA Unconstitutional.  Late Friday afternoon March 1, 2024, Federal Court Judge Liles C. Burke, sitting in the Northern District of Alabama ruled that the “the Corporate Transparency Act is unconstitutional because it exceeds the Constitution’s limits on Congress’ power.”  National Small Business United dba the National Small Business Association, et. al., v. Janet Yellen, in her official capacity as Secretary of the Treasury, et. al.  The Court also ordered that “[t]he Defendants, along with any other agency or employee acting on behalf of the United States, are permanently enjoined, from enforcing the Corporate Transparency Act against the Plaintiffs.” 

Now, before anyone not looking forward to figuring out the CTA’s complexity says “Roll Tide,” we do expect that this decision will be appealed.  There also may be some clarification as to the scope of the injunction as the plain language of the order states “against the Plaintiffs.”   Lastly, we expect that any challenges that survive appeal will likely be remedied in future drafts.  In short, it is our expectation that this battle will continue and at the end of it, we expect that either the CTA or something very similar will be part of a new norm for corporate reporting.  We’ll see what happens over the next few months. 

ABOUT ADISHIAN LAW GROUP, P.C.

Adishian Law Group is a California law firm with a statewide M&A practice led by Chris Adishian, recipient of Martindale-Hubble’s “AV-Preeminent” rating. To see past transactions, please view our Case Studies.

For more information about this article, or if you need help with your sale or acquisition, please contact Chris Adishian:

Telephone: 310.726.0888 | 650.955.0888 | 415.955.0888
Email: askalg@adishianlaw.com
Social Media: @adishianlaw | LinkedIn | Facebook | YouTube

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