On December 3, 2024, it was announced that Judge Amos L. Mazzant, III of the U.S. District Court for the Eastern District of Texas issued an order purporting to impose a NATIONWIDE preliminary injunction on enforcement of the Corporate Transparency Act, which required most small businesses to report beneficial owner identifying information to the Financial Crimes Enforcement Network. View the order here.

The preliminary injunction has now been appealed.

What does that mean for your business?  Enforcement of the January 1, 2025 deadline is still on hold unless the preliminary injunction is reversed.

We will continue to monitor the developments of this case and provide updates as they unfold.

Find more details surrounding the Corporate Transparency Act here.

CORPORATE TRANSPARENCY ACT IN ACTION | TALES FROM THE TRENCHES – PART 1

And so begins the inevitable experiential anecdotes in this, the first year of implementation of the Corporate Transparency Act (“CTA”).  I wrote a general overview of this law on January 15, 2024.  I fully expected to encounter noteworthy experiences and information as this year progresses, and so far, I have not been disappointed.  I hope to continue to share our experiences, and invite you to do the same.

TALE #1: ARE WE A LARGE OPERATING COMPANY?

Before I posted my article, I got an email from a client asking me to confirm that his company would be exempt from the CTA based on the following:

For example, to take advantage of the “large operating company” exemption, an entity must (1) employ 20 full-time employees in the United States; (2) have an operating presence at a physical office in the United States and filed a federal income tax or information return in the United States demonstrating more than $5,000,000 in gross receipts or sales.

At first glance, based on what I knew about the company, I thought this was an easy yes.  As any lawyer must do, I went to the actual law to confirm.  Not surprisingly, I needed to ask some more questions.  For purposes of the exemption, the CTA has its own guidance regarding whether an employee is a “full-time employee,” and even what is considered the “United States!”  Generally, a full-time employee averages 30 hours per week, or 130 hours per month.   The United States means “[t]he States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States.”  In addition, “gross receipts” means “net of returns and allowances” and net of any such gross receipts or sales “from sources outside of the United States.”  Once I clarified these points with the client, I was able to confirm his company should be exempt from the CTA.

TALE #2:  THE PROCESS OF FILING THE BENEFICIAL OWNER INFORMATION (“BOI”) REPORT

I already have personal knowledge of an individual attempting to file the BOI report on his own.  While it was mostly correct, he omitted an individual with “substantial control” that was not an owner.  His experience was that one is not offered guidance in the process of completing the report; therefore, it is important that the client either receive competent advice or thoroughly review the informational materials provided by FinCEN and others prior to filing the report.

TALE #3:  OBTAINING AND USING FinCEN IDENTIFIERS

As discussed in the original article, the CTA allows individuals who are either a beneficial owner or otherwise exercise substantial control over a reporting company, to obtain a FinCEN identifier, and provide that to reporting companies in lieu of their personally identifiable information (“PII”) required by the CTA.  This allows the individual to submit their PII directly to FinCEN rather than the reporting company.  I am not sure how much comfort that provides the individuals, but it is an opportunity to simplify the obligations of the applicable reporting company(ies), discussed further below.

Your humble author is the proud owner of her own FinCEN identifier.  It was fairly easy to get one.  You can get yours here:  https://fincenid.fincen.gov/landing.  An interesting and query-inducing side note:  You will be required to log in using login.gov, which is a system maintained by the Federal government for use by the public and interaction with participating government agencies.  I tried to create a new account, and was told I already have one, though I have no recollection of ever setting up such an account.  I do, however, have an Id.me account that I set up some years ago.  Id.me is a third-party service used by some government agencies for interaction with the public (including IRS which, like FinCEN, is also part of the U.S. Treasury).  Perhaps there was some crossover there?  Who knows?  

Once I was able to log in, I was able to get the FinCEN identifier pretty easily, as I stated above.  I took a picture of my driver’s license and submitted that.  Now, if I move, I will have to file an updated report with FinCEN.  However, any companies for which I am a beneficial owner or otherwise have “substantial control” will not have to file an updated BOI report when my information changes.

Please consider a hypothetical based on a real example in our office.  Below is a chart (which has been abbreviated!) of companies in which our clients, two brothers, are involved as beneficial owners:  

These clients are incredibly fortunate to have (and to have had for a long time) a brilliant and capable assistant that helps them and us keep all of this straight.  Not all of our clients have that.

Imagine one person in charge of all of this, having to gather PII for all beneficial owners and others with substantial control as defined by the CTA.  Then imagine what happens when one brother moves.  In this hypothetical, one brother’s move would trigger TEN new BOI reports!  As you may have figured out, as did their brilliant assistant, the brothers are obtaining their own FinCEN identifiers.  We are also exploring the use of FinCEN identifiers for entities “upstream” of the reporting company.

I recommend, however, that this be taken a step further and that, in our hypothetical, all JV partners also obtain their own FinCEN identifiers.  This should ease the burden of the reporting companies regarding providing FinCEN with any updates to the personal situations of its beneficial owners and other with substantial control.

I further contend that this strategy is appropriate for any entity with more than one beneficial owner or other individual with “substantial control.”  One day I might contend it makes sense even for entities with only one applicable person.  I do not think it would be detrimental in any material way to take that approach.  

Again, stay tuned, I am sure there is more to come.

Y’ALL READY FOR THIS?

If you own or manage a small business, unless you have been living under a rock the past year or so, you have almost certainly heard about the Corporate Transparency Act (“CTA”) and the new requirements for “beneficial owner information” (“BOI”) reporting.  First, I have included some TL; DR takeaways, and below that, more detailed discussion of the new law.  Each takeaway is linked to the relevant discussion below.  Be advised that this article is for general informational purposes and does not constitute, or provide suitable substitute for, legal advice.  This is information is current as of January 1, 2024.

For the latest update, as of December 3, 2024, click here. For the update as of February 7, 2024, click here.

TL;DR

1. DOES THIS APPLY TO MY COMPANY? Unless your company qualifies for one of the 23 specific exemptions, this new law is something you must contend with.  Most businesses will be affected.
2. WHAT DO I HAVE TO DO?  You must file a report with FinCEN identifying information (name, date of birth, address, unique identification number, and copy of documentation of identification number) for your company’s “beneficial owners” (as defined by the law).  You should be reviewing and implementing protocols to ensure the accuracy of identifying information provided to you for purposes of the CTA.  These protocols should include measures to maintain the confidentiality of this information, just as owner information reported for tax and record-keeping purposes should remain private. See also the discussion below concerning the recently promulgated rules concerning access to information received and stored by FinCEN.¹
3. WHEN DO I HAVE TO DO IT?  If your company was created before 1/1/2024, you have until January 1, 2025 to file your initial report.  If your company was created on or after January 1, 2024, you have 90 days from the company’s creation to file the initial report, which must include the same information for the “company applicant(s)” (as defined by the law) as required for beneficial owners.  Companies created after January 1, 2025 will have 30 days from the company’s creation to file the initial report.  
4. DO I HAVE TO DO THIS EVERY YEAR OR EVER AGAIN?  Reporting is not an annual requirement; however, new reports must be filed within 30 days if there is a change in any information previously reported.  Errors must be corrected within 90 days of the filing of the inaccurate information or, if later, 30 days after you become aware of the inaccuracy. See section (a)(3) of 31 CFR 1010.380.
5. WHAT HAPPENS IF I DON’T FILE?  The law provides for various penalties.  Your company may be subject to penalties of $500 per day for failing to file the report.  Individuals by be fined up to $10,000 or imprisoned for up to two years upon conviction for willfully failing to file or willfully filing inaccurate information.  These penalties increase to up to $500,000 and ten years of imprisonment if noncompliance is part of additional illegal activity. See section (h)(3)(B)(ii)(II) of 31 U.S.C 5336.

DISCUSSION

Introduction

The new law was enacted in 2021 and is the result of years of legislative efforts going back to 2008 to give law enforcement agencies (primarily) information to combat financial crimes.  Accordingly, the new law is enforced by the Federal Financial Crimes Enforcement Network (“FinCEN”).  The background of this new law is beyond the scope of this article; however, the American Bar Association has an excellent discussion of this at the link provided in the notes below.²

The CTA is enshrined into law in Section 5336 of Chapter 31 of the United States Code.³  The core of the law is this statement: “In accordance with regulations prescribed by the Secretary of the Treasury, each reporting company shall submit to FinCEN a report that contains the information described in paragraph (2) [of 31 U.S.C. 5336(b)]”.  Paragraph (2) provides that this report will “identify each beneficial owner of the applicable reporting company and each applicant with respect to that reporting company by (i) full legal name; (ii) date of birth; (iii) current, as of the date on which the report is delivered, residential or business street address; and (iv)(I) unique identifying number from an acceptable identification document; or (II) FinCEN identifier in accordance with [certain] requirements….” (Emphasis added).  The rules implementing the CTA further require that the report include an image of the document from which the unique identifying number is obtained, which must be a current U.S. passport, State or Indian tribe issued identification, State issued driver’s license, or current non-U.S. passport if the individual does not have any of the other listed documents.

As you can imagine, there is a lot to unpack in this deceptively short core provision of the law.  There are numerous definitions, exceptions, and exemptions in the statute and in the accompanying rules/regulations.  The rules and regulations are found in 31 CFR (Code of Federal Regulations) 1010.380.⁴ Thankfully, FinCEN has published helpful guidance in the form of the Small Entity Compliance Guide⁵ and has compiled a health list of frequently asked questions (and answers).⁶  

The CTA defines “reporting company” as “a corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”  This definition encompasses essentially every form of entity that can lawfully do business in the U.S., including but not limited to corporations, professional associations, limited liability companies, professional limited liability companies, limited partnerships, non-profit corporations, and business trusts.

There are 23 exemptions; however, these will not apply to many small businesses.  Generally speaking, these exemptions include publicly traded companies, governmental bodies, banks, credit unions, brokerages, investment companies, insurance companies, public accounting firms, public utilities, tax exempt entities (not all non-profits-for example, most home owner associations will be subject to reporting requirements unless the law is changed⁷), inactive companies, and large operating companies.  Generally speaking (again), a “large operating company” will employ more than 20 full-time employees (under applicable laws), will have an operating presence at a physical office within the United States, and will have reported more than $5,000,000 in gross receipts or sales (net of returns or allowances) on its prior year’s Federal income tax return.  

Reporting Obligations

As noted above, the CTA requires any reporting company to submit to FinCEN a report that identifies the reporting company’s beneficial owners and company applicant(s) by (i) full legal name; (ii) date of birth; (iii) current, as of the date on which the report is delivered, residential or business street address; and (iv)(I) unique identifying number from an acceptable identification document; or (II) FinCEN identifier in accordance with [certain] requirements….”  The report must also include an image of the document from which the unique identifying number is obtained, which must be a current U.S. passport, State or Indian tribe issued identification, State issued driver’s license, or current non-U.S. passport if the individual does not have any of the other listed documents.

The term “beneficial owner” of an entity means “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity; and does not include (i) a minor child, as defined in the State in which the entity is formed, if the information of the parent or guardian of the minor child is reported in accordance with this section; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an individual acting solely as an employee of a corporation, limited liability company, or other similar entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person; (iv) an individual whose only interest in a corporation, limited liability company, or other similar entity is through a right of inheritance; or (v) a creditor of a corporation, limited liability company, or other similar entity [unless the creditor is also a beneficial owner of the company through an ownership interest that is separate from its interest as a creditor].” (Emphasis added).

“Substantial Control” is not defined in the statute.  FinCEN provided in its Final Rule on beneficial ownership reporting that an individual exercises “substantial control” over a reporting company if the individual (1) serves as a senior officer of the reporting company, (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), (3) directs, determines, or has substantial influence over important decisions made by the reporting company, or (4) has “any other form of substantial control over the reporting company.”  

It may not always be clear who does and does not have “substantial control.”  Also, for many companies, calculating 25% ownership may be a simple matter. This can be more difficult, however, for a corporation with outstanding options, or for an LLC with an operating agreement that calls for a distribution waterfall.  Other scenarios in which it may be difficult to determine whether a person or entity must be included in the report include reporting companies involving trusts, convertible debt, directors that are not also owners, and other arrangements where substantial control may exist purely by contract, among others, as evidenced by the lengthy FinCEN FAQ page mentioned above and linked in the notes below.

The final rule allows an individual (beneficial owner or the applicant(s)) to provide a FinCEN identifier in lieu of the other personally identifying information required. 

“FinCEN identifier” means the unique identifying number assigned by FinCEN to an individual or reporting company under the CTA.  An individual must apply to FinCEN for this identifier and in doing so, must provide the same information that it would otherwise provide to the reporting company.  If an individual has concerns about providing this information to the reporting company, then such individual can provide the FinCEN identifier instead.  This does not, however, allow a beneficial owner to withhold information that a reporting company may need for other purposes, such as for banking purposes, or preparation of tax returns.  Information reported to FinCEN will not be public, and will be available to Federal, State, local, or Tribal law agencies in accordance with rules promulgated by FinCEN.  The final rule was promulgated December 22, 2023⁸.

“Company applicant” means the individual who directly files the document that creates the reporting company or first registers a foreign reporting company AND the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.  

Filing the Report

FinCEN is responsible for providing the format and platform for filing the report, which must be done electronically.  In the final rules and regulations, FinCEN has provided that the initial report of a reporting company shall include (and presumably subsequent reports will have the same requirements) the reporting company’s full legal name; any trade name or “doing business as” name; a complete current address consisting of the street address of the principal place of business or the primary location in the United States where a foreign reporting company conducts business in the United States; the State, Tribal, or foreign jurisdiction of formation of the reporting company and, for a foreign reporting company, the State or Tribal jurisdiction in the U.S. where such company first registers; and the Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.  The link to the FinCEN page where the report can be initiated is provided in the notes below.⁹

Important Deadlines

Reporting companies in existence prior to the effective date of FinCEN’s implementing regulations have one year (until January 1, 2025) to file their first beneficial ownership report, which, notably, does not have to include information for the company applicant if that person is not also a beneficial owner.  Reporting companies formed on or after January 1, 2024 (or registered to do business in the U.S. on or after that date) must provide the required report for each beneficial owner, and for the company applicant.  For 2024, these reports must be filed within 90 calendar days after the reporting company is created or registered to do business in the U.S.  Reporting companies formed or registered on or after January 1, 2025, under the current rules, must file the report within 30 calendar days after the reporting company is created or registered to do business in the U.S.  

Updates to information reported must be filed within 30 calendar days of any change.  It is worth noting here that if a reporting company files a report and subsequently meets the criteria for one of the exemptions, the reporting company will be required to file an updated report.  Conversely, if an exempt company that has never filed a report no longer meets the criteria for any of the exemptions, the reporting company must file its initial report within 30 calendar days thereafter.  Other update triggers include interests passing through inheritance, and a minor child reaching the age of majority if prior reporting included the information of a parent or guardian in lieu of the minor child’s information.

In addition, corrections to inaccuracies must be reported before the later of 90 calendar days of the date the inaccurate report was filed, or 30 calendar days after the date on which the reporting company becomes aware of or has reason to know of the inaccuracy.  

Penalties for Non-Compliance

There are multiple penalties for non-compliance with the CTA, and they are significant.  The reporting company will be subject to a fine of $500 per day for failing to file a BOI report. Individuals may also be fined up to $10,000 or imprisoned for up to 2 years upon conviction for willfully failing to file or willfully filing inaccurate information.  When a failure to file is combined with other illegal activity, or is “part of a pattern of any illegal activity involving more than $100,000 in a 12-month period,” criminal penalties can be increased up to $500,000 and imprisonment for up to 10 years.

CONCLUSION

Reporting companies will need to devote the necessary resources, attention, and senior personnel to ensure timely and accurate reporting to FinCEN, similar to but perhaps more stringent than requirements surrounding tax reporting.  Competent legal advice will be critical, especially in the early stages of the implementation of this new law.  I expect the upcoming year to be eventful as small businesses work to understand and comply with the CTA, and as questions inevitably and continually arise.  Hopefully, FinCEN will continue to put out guidance as the practical implications bear out.  You can sign up to receive FinCEN updates here.  Stay tuned…

HELPFUL LINKS:

• https://www.fincen.gov/sites/default/files/shared/BOI_FinCEN_Brochure_508C.pdf
• Introductory video (0:55) https://www.youtube.com/watch?v=nx48tPUbRK0
• Informational video (4:27) https://www.youtube.com/watch?v=qQ5ABgZ6Xn4
• https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
• https://www.fincen.gov/boi-faqs
• https://www.fincen.gov/boi

ENDNOTES:

^1. See note 8 and related discussion.

^2. https://www.americanbar.org/groups/business_law/resources/business-law-today/2021-may/the-corporate-
transparency-
act/#:~:text=The%20Corporate%20Transparency%20Act%20requires,Treasury%20(%E2%80%9CTreasur
y%E2%80%9D).

^3. https://www.govinfo.gov/content/pkg/USCODE-2022-title31/pdf/USCODE-2022-title31-subtitleIV-
chap53-subchapII-sec5336.pdf

^4. See: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-
information-reporting-requirements; https://www.federalregister.gov/documents/2023/11/08/2023-
24559/use-of-fincen-identifiers-for-reporting-beneficial-ownership-information-of-entities#citation-1-
p76995; and https://www.federalregister.gov/documents/2023/11/30/2023-26399/beneficial-ownership-
information-reporting-deadline-extension-for-reporting-companies-created-or#sectno-citation-1010.380

^5. https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf

^6. https://www.fincen.gov/boi-faqs

^7. https://blog.lawfirmcarolinas.com/what-is-the-corporate-transparency-act-and-why-it-matters-to-your-
association-and-directors/

^8. https://www.federalregister.gov/documents/2023/12/22/2023-27973/beneficial-ownership-information-
access-and-safeguards#sectno-citation-1010.955

^9. https://www.fincen.gov/boi