Under the Corporate Transparency Act (CTA), many businesses had to begin complying with new reporting requirements on January 1, 2024. But on March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional.
Does that mean that businesses no longer have to comply? Unfortunately, that's not the case for those who would like to skip the requirements.
The federal government filed an appeal on March 11, 2024, in the U.S. Court of Appeals for the 11th Circuit. That same day, the Financial Crimes Enforcement Network (FinCEN) announced that the law's requirements are still in effect for those not involved in the court case.
"While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court's order," FinCEN stated. "Other than the particular individuals and entities subject to the court's injunction … reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN's regulations."
Under the CTA, certain companies must provide information related to their "beneficial owners" — the individuals who ultimately own or control the company — to FinCEN. Failure to submit a beneficial ownership information (BOI) report may result in civil or criminal penalties, or both.
The CTA is intended to reduce exposure to serious crimes, including terrorist financing, money laundering and other illegal activities. But it could also open the door to the inspection of family offices, investment angels and other private individuals who may have been shielded from scrutiny in the past.
The CTA's rules generally apply to both domestic and foreign privately held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that is properly registered to do business in the United States.
The complete list of entities that are exempt from the reporting rules is too lengthy to include here — ranging from government units to not-for-profit organizations to insurance companies and more. Notably, an exemption was created for a "large operating company" that employs more than 20 employees on a full-time basis, has more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and physically operates in the United States. However, many of these companies already must meet other reporting requirements providing comparable information.
If an entity initially qualifies for the large operating company exemption but subsequently falls short, it must then file a BOI report. On the other hand, an entity that might not currently qualify for an exemption can update its status with FinCEN to potentially gain exemption status.
FinCEN announced on November 29, 2023, that it was amending the BOI reporting rules. Initially, reporting companies had either 30 days or one year from the effective date (January 1, 2024) to comply with the reporting requirements. Now, reporting companies will have 30 days, 90 days or one year from the January 1, 2024, effective date to comply with the reporting requirements.
The deadline to comply depends on the entity's date of formation. Reporting companies created or registered prior to January 1, 2024, have one year to comply by filing initial reports. Those created or registered on or after January 1, 2024, but before January 1, 2025, will have 90 days upon receipt of their creation or registration documents to file their initial reports.
In the future, those created or registered on or after January 1, 2025, will have 30 days upon receipt of their creation or registration documents to file their initial reports. Beneficial ownership information won't be accepted by FinCEN until the effective date.
If you determine that your business must meet these obligations, stay tuned for more about the CTA appeals court case. But for now, consult with your legal and professional advisors for guidance on complying with the law.
The lawsuit against the reporting rules required under the Corporate Transparency Act was brought by two parties:
The first plaintiff is the National Small Business Association (NSBA), which describes itself as "an Ohio non-profit corporation that represents and protects the rights of small businesses across the United States," including "over 65,000 businesses and entrepreneurs located in all 50 states." The group's stated purpose is "to advocate for its members" and their employees and "to provide its members guidance and data on how to navigate government regulations."
The second plaintiff is an NSBA member and owner of two small businesses, one of which "is a small family business with 3 full-time employees and annual turnover of under $20 million," the court case stated.
(National Small Business United d/b/a the National Small Business Association, et al, v. Yellen)
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