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

Nuts and Bolts:  Year End and First Quarter

Each year bring new challenges and new law changes.  However, the everyday “nuts and bolts” of running a business remain the same.  Here’s a quick checklist of legal issues and opportunities our clients experience in the first quarter.  Perhaps you will recognize some of these from your own experience.

1.  Employee Comings and Goings.  Annually, the end of year through the first quarter of every year is “bonus season” and “job change” season.  It just is.  During the first quarter, we are often asked to assist our business clients with resolving issues with employee departures such as bonus disputes, severance agreements and protecting trade secrets.  

2.  Company Handbooks.  If you have not already, the new year is the perfect time to update your Company handbook.  We believe a good Company handbook is a smart and valuable tool for any business enterprise — for policies, for culture and for minimizing risk of employee related litigation.  

3.  LLC and Corporation Formations.  As one year ends and the next begins, we also see a lot of new entity formation, either with the goal of forming before year end or starting the year off with a new entity.  We regularly help existing clients and new entrepreneurs with their entity formations.  The LLC remains extremely popular.  As noted above, entity formations will be impacted with the arrival of the CTA.

Here are just some of the reasons that businesses or entrepreneurs form entities:

  • Start a new business — professional services, podcast, e-commerce or any other lawful business 
  • Create a subsidiary through which to conduct a new business 
  • A project has started to grow from a hobby or curiosity into a business 
  • To segregate projects for financings or investments
  • To raise money 
  • To hold real estate 
  • Of course, there is also the promise of limited liability with an entity

4.  General Counsel Services.  Our client roster has included well-over 150 entity clients spanning a range of industries.  Many of these are thriving, ongoing entities that are leaders in their respective marketplaces.  The size of these businesses ranges from a single person start up to entities generating over $100 million in annual revenue, with much higher valuations.  We’re grateful for their trust and confidence, and the privilege of being able to be part of their success.  If your business is facing a legal challenge or opportunity (e.g. lease, purchase, sale, employee, contract negotiation or something else), or if you are simply ready to add a law firm relationship to your team, we’re happy to meet with you to learn how our experience and expertise may be able to help your company and to see if there is a good fit.

and the last one on our list to start the year….

5.  Dispute Resolution and Litigation Management.  Conflict is part of life and business.  The end of the year does not always mean the end of litigation or threatened litigation.  Where litigation or threatened litigation has become a distraction to business operations, our clients retain us to help manage, understand and explain the litigation as it progresses to conclusion.  In legal terms, our clients will retain us as their “general counsel” to help oversee the conduct of the litigation by their chosen or assigned litigation counsel of record who is representing them in Court or Arbitration.  In non-legal terms, we are retained as a specialized “Project Manager” to oversee the lifecycle of the “litigation project” being handled by the counsel of record. As we have often said, a business owner’s job is not to be mired in litigation, it is to grow the positive cash flow of the business. 

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