Corporate Transparency Act — Preliminary Injunction on the Beneficial Ownership Information Reporting
RE: Recent Legal Developments Regarding the Corporate Transparency Act — Preliminary Injunction on the Beneficial Ownership Information Reporting
Williams & Company PC sending this communication to provide you with a brief overview of recent legal developments regarding the Beneficial Ownership Information (BOI) reporting requirements under the Corporate Transparency Act (CTA).
Overview of Recent Legal Developments
On December 3, 2024, the U.S. District Court for the Eastern District of Texas (“the Court”) issued an order granting a nationwide preliminary injunction (“Order”) against enforcing the CTA’s BOI reporting requirements. The Court determined that the CTA is likely unconstitutional as outside of Congress’s power, and because the BOI reporting rule implements the CTA, it is likely unconstitutional for the same reason. As such, Reporting Companies need not comply with the CTA’s reporting deadline pending further order of the Court.
In response, the Department of Justice (DOJ) filed an appeal on December 5, 2024, seeking to overturn the Court’s ruling noting that it prevents the Financial Crimes Enforcement Network (FinCEN) from enforcing BOI reporting nationwide.
FinCEN has issued an alert (“Alert”) acknowledging that while this litigation is ongoing, FinCEN will comply with the Order for as long as it remains in effect. Therefore, Reporting Companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, Reporting Companies may continue to voluntarily submit beneficial ownership information reports. In its Alert, FinCEN’s noted that Texas Top Cop Shop, Inc., et al. v. Garland, et al. is only one of several cases pending before courts around the country in which plaintiffs have challenged the constitutionality of the CTA. Several district courts have denied requests to enjoin the CTA, ruling in favor of the Department of the Treasury. The government continues to believe — consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon — that the CTA is constitutional.
What This Means for You
It is apparent that these recent legal developments have added more uncertainty, and some hope that the conflicting district court rulings may influence Congress to extend the initial reporting deadline to afford time for the courts to decide the constitutionality of the CTA. But such congressional action is far from certain. As such, for Reporting Companies that have not yet filed their initial BOI report, it may be prudent to continue to prepare for compliance by gathering all information and documents that the CTA requires.
Should the DOJ’s appeal succeed, being fully prepared with a complete and accurate FinCEN reporting form and ready to “hit send,” if ultimately required, would be prudent to avoid the risks and associated penalties for noncompliance. Note that penalties for willfully violating the CTA’s reporting requirements include (1) civil penalties of up to $591 per day that a violation is not remedied, (2) a criminal fine of up to $10,000, and/or (3) imprisonment of up to two years.
As the CTA is not a part of the tax code, the assessment and application of many of the requirements set forth in the CTA regulations, including but not limited to the determination of beneficial ownership interest, may necessitate the need for legal guidance and direction. As we are not attorneys, our firm is not able to provide you with any legal determination as to whether an exemption applies to the nature of your entity or whether legal relationships constitute beneficial ownership. In addition, we are not able to address the legal implications of these recent court proceedings.
Reporting Deadlines
As currently promulgated, the CTA’s reporting deadlines are as follows:
- All existing Reporting Companies — those formed or registered before January 1, 2024 — must report required information no later than January 1, 2025.
- All new Reporting Companies formed or registered on or after January 1, 2024, and before January 1, 2025, must report required information within 90 calendar days after their formation or registration.
- All new Reporting Companies formed or registered on or after January 1, 2025, must report required information within 30 calendar days after their formation or registration.
- Updated BOI reports are due within 30 calendar days after a change occurs.
- Corrected BOI reports are due within 30 calendar days after the Reporting Company becomes aware of, or has reason to know of, an inaccuracy.
Refer to FinCEN’s Frequently Asked Questions document (https://www.fincen.gov/boi-faqs) or to the FinCEN Reference Materials (https://www.fincen.gov/boi/Reference-materials) for detailed information and updated guidance regarding deadline changes that may be promulgated.
Next Steps
From our firm’s perspective, preparation remains paramount given the complexities of the current legal and regulatory landscape of the CTA. We strongly encourage any entity deemed a “Reporting Company” under the CTA to continue to gather and maintain accurate information about their beneficial owners and company applicants. For your reference, please see the attached Addendum which provides a general overview of the BOI reporting rules as well as initial steps you should take to address the implications of the CTA to your organization.
If you have any questions regarding the legal implications of these recent court proceedings, or need assistance with a legal determination as to whether an exemption applies to your entity or whether legal relationships constitute beneficial ownership, we strongly encourage you to reach out to legal counsel with expertise in this area to assist your organization.
For additional information regarding the beneficial ownership reporting requirements under the CTA, refer to FinCEN’s Frequently Asked Questions document at https://www.fincen.gov/boi-faqs.
As always, please feel free to contact us if you have any questions.
ADDENDUM
The Corporate Transparency Act (“CTA”) was enacted January 1, 2021, as part of the National Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act and related anti–money laundering rules since the U.S. Patriot Act. The CTA is intended to address and guard against money laundering, terrorism financing, and other forms of illegal financing by mandating certain entities (primarily small and medium-size businesses) to report “beneficial ownership” information to the Financial Crimes Enforcement Network (“FinCEN”).
The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect, and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances.
What entities are subject to the new CTA reporting requirements?
Entities required to comply with the CTA (“Reporting Companies”) include corporations, limited liability companies (LLCs), and other types of companies that are created by a filing with a Secretary of State (“SOS”) or equivalent official. The CTA also applies to non-U.S. companies that register to do business in the U.S. through a filing with a SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.
There are a number of exceptions to who is required to file under the CTA. Many of the exceptions are entities already regulated by federal or state governments and as such already disclose their beneficial ownership information to governmental authorities.
Another notable exception is for “large operating companies” defined as companies that meet all of the following requirements:
- Employ more than 20 full-time employees in the U.S.
- Gross revenue (or sales) over $5 million on the prior year’s tax return
- An operating presence at a physical office in the U.S.
Who is considered a “beneficial owner” of a Reporting Company?
A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of the company’s ownership interests.
An individual exercises “substantial control” if the individual (i) serves as a senior officer of the company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; or (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company.
In addition, individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.
CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense, so many companies may need to seek legal guidance to ultimately determine who are deemed beneficial owners within their organization.
How to prepare for the CTA
With the CTA introducing a new and expansive reporting regime, now is the time to assess the new rules’ implications to your organization. Some questions and comments for your company to consider now, although not meant to be all inclusive, include:
- Is your company subject to the CTA or do you qualify for any of the exemptions?
- If your company is not exempt, how should you calculate percentages of “ownership interests” to determine whether any owners meet the 25%-ownership threshold? In many companies with simple capital structures, the answer will be obvious. It may be much less obvious, however, for companies with complicated capital structures (given the expansive definition of “ownership interest”), or companies in which some ownership interests are held indirectly — for example, through upper-tier investment entities, holding companies, or trusts.
- How do you assess and determine each person who exercises “substantial control” over the company? There may well be multiple people who qualify, given the expansiveness (and vagueness) of the “substantial control” definition.
- What new processes, procedures, and/or systems should the company put in place to monitor and track future changes in its beneficial owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN? Note that the types of information that must be provided to FinCEN (and kept current) for these beneficial owners include the owner’s legal name; residential address; date of birth; and unique identifier number from a non-expired passport, driver’s license, or state identification card (including an image of the unique-identifier documentation). A word of caution — this may be problematic for Reporting Companies, as you will need to rely on beneficial owners to timely update you on reportable changes to their information (e.g., ownership changes, moves, marriages, divorces, etc.). As a result, a company’s operating agreement may need to be revised to include provisions related to the CTA such as representations, covenants, indemnifications, and consent clauses. For example, the operating agreement may require:
- A representation by each shareholder, member or partner, as applicable, that it will be in compliance with or exempt from the CTA;
- A covenant by each shareholder, member or partner, as applicable, requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements;
- An indemnification by each shareholder, member or partner, as applicable, to the company and its other shareholders, members or partners, as applicable, for its failure to comply with the CTA or for providing false information; and
- A consent by each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law.
