The Corporate Transparency Act (“CTA”) went into effect on January 1, 2024. The CTA requires all legal entities formed or registered to do business in the U.S. that do not otherwise qualify for an exemption to file timely a beneficial ownership information (“BOI”) report with the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

To assist filers of the BOI report required by the CTA, FinCEN has prepared “Frequently Asked Questions” (“FAQs”) and, on April 18, 2024, added and updated certain questions and in determining their BOI reporting obligations.

FinCEN confirms in the FAQs that a corporation’s tax classification as an “S corporation” does not affect the BOI reporting requirement. It also confirms that, if a domestic corporation or limited liability company is not created by the filing of a document with a secretary of state or similar office, such entity is not required to file a BOI report.

FinCEN provides guidance as to the circumstances under which a homeowners’ association is required to file a BOI report and how to determine the beneficial owner of a homeowners association that does qualify as a reporting company under the CTA.

The FAQs clarify that a beneficial owner of a reporting company must be an individual and cannot be a trust, corporation or other legal entity. However, a beneficial owner can own or control a reporting company through a trust, and guidance is given to determine who the beneficial owners are when ownership or control is held through a trust or when a trust has a corporate trustee.

FinCEN also clarifies that, if a reporting company lacks a principal place of business in the U.S., then the reporting company must report to FinCEN its address the primary location in the U.S. where it conducts business. If the reporting company conducts business at several locations within the U.S., it may report as its primary location the address of any such location where the reporting company receives important correspondence. If the reporting company does not conduct business at any location within the U.S., then the primary location of the reporting company is the address in the U.S. of the person that the reporting company has designated to accept service of process on its behalf.

The FAQs advise that, if a company was created or registered before January 1, 2024 and was exempt from the BOI reporting requirements, but loses its exempt status during 2024, then it has until the later of January 1, 2025 or the 30th day after the company loses its exempt status to file its initial BOI report. The FAQs also specify that, as of April 18, 2024, the daily civil penalty for willful violation of the BOI reporting requirement is $591 (as adjusted for inflation).

The FAQs also address the filings required if a company has a BOI reporting obligation but later qualifies for the large operating company exemption (more than 20 full-time U.S. employees with a physical office in the U.S., and have filed a U.S. tax return or information return in the prior year with over $5 million in gross receipts) and vice versa. For example, a company that has 17 full-time U.S. employees but meets the other requirements of a large operating company would need to file a BOI report. If the company later hires 4 more full-time U.S. employees, it would have to file another BOI report to indicate that it is a “newly exempt entity,” which is a box that can be checked on the type of filing in the BOI report. If the company later terminates one full-time employee, it would need to file an updated BOI report. Updated BOI reports are required to be filed within 30 days of the applicable change.

The new FAQs also provide insight into how the government will use the information companies provide. FinCEN may release the BOI to Federal agencies engaged in national security, intelligence or law enforcement activities and to regulatory agencies that supervise financial institutions. FinCEN is taking a phased approach to provide access to agencies and financial institutions. Prior accessing BOIs, agencies must enter into a memorandum of understanding with FinCEN regarding the protection and security of the information. State, local and Tribal law enforcement agencies will be able to request BOIs under certain circumstances if authorized by a court of competent jurisdiction in connection with a criminal or civil investigation. Also, state regulatory agencies that supervise financial institutions may also request BOI. Prior to obtaining access to BOIs, state, local and Tribal agencies will also need to enter into a memorandum of understanding with FinCEN regarding the protection and security of the information.

Foreign governments cannot directly access BOIs but can request them for certain law enforcement or national security related purposes through intermediary Federal agencies; however, such requests are not yet being processed as of April 18, 2024. If you need direction on filing BOIs and avoiding the daily penalty for failure to file, contact your tax preparer or your business attorney to help you get it right.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

A U.S. District Court judge sitting in the Northeastern Division of the Northern District of Alabama has found the Corporate Transparency Act (“CTA”) unconstitutional in a memorandum opinion. The opinion granted the plaintiffs, the National Small Business United (NSBU) and Isaac Winkles, an NSBU member, summary judgment motion based on its finding that the CTA is unconstitutional. The final judgment permanently enjoined the Secretary of the Treasury and other government defendants, as well as “any other agency or employee acting on behalf of the United States,” from enforcing the Corporate Transparency Act against the plaintiffs in the litigation.

The CTA requires nonexempt companies (domestic or foreign corporations, limited liability companies, and other entities formed or, in the case of foreign entities, registered to do business in any U.S. state or tribal jurisdiction) to disclose certain information, including about their beneficial owners, to the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Treasury Department. Exempt firms include (among others) “large operating companies” with a presence in the U.S., entities with a class of securities registered under the Securities Exchange Act of 1934, as amended (or registered under the Investment Company Act of 1940, as amended, or the Investment Advisers Act of 1940, as amended), and controlled or wholly owned subsidiaries of certain exempt firms.

The Court’s opinion specifically holds that the U.S. Congress acted outside the scope of its constitutional power in enacting the CTA and was not authorized under the Commerce Clause, Congress’s taxing power, or the Necessary and Proper Clause. It also found it could not be justified as incidental to the exercise by Congress of its express legislative authority.

The U.S. Treasury Department has advised that it considers the District Court opinion to only apply to NSBU and Winkles and has indicated that it will still enforce CTA compliance. Failure to comply with the terms of the CTA can result in the imposition of substantial fines and penalties.

If your company is a nonexempt entity under the CTA and you have serious misgivings in providing beneficial ownership information about the company to the U.S. Treasury Department. Contact your business legal counsel to see if contesting the constitutionality of the CTA is right for your business.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.