Business owners need to be aware as CTA deadline approaches

By GARRETT C. REUTER, JR.

Centralized nationwide corporate registries are not uncommon and are found throughout the world. Most European countries maintain centralized business registers, as do several major economies in Asia, including India, Japan, and Singapore. While the extent of company data captured in registers might differ, the notion of national governments maintaining such a database is not new.

The United States has been an outlier in this regard. Our federal system of government—and the states’ traditional lead role in corporation law—has led to a patchwork of registers across the states that some have criticized as leading to higher levels of financial crime, such as money laundering, terrorist financing, and tax evasion. The Corporate Transparency Act (CTA) was passed as part of the Anti-Money Laundering Act of 2020 (and as an amendment to the Bank Secrecy Act of 1970) as a means to combat this perceived shortcoming of the previous regulatory framework.

In passing the CTA, legislators noted that a lack of state law requiring companies to identify certain owners has enabled bad actors to conceal illicit activities through the use of shell companies. The CTA directs the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) to implement rules specifying information to be collected from “Reporting Companies” to identify “Beneficial Owners” (the individuals who own and control a Reporting Company) and “Company Applicants” (the individuals who form a Reporting Company) through the filing of a Beneficial Ownership Information (BOI) report. The CTA also tasks FinCEN with establishing and maintaining a national registry of Reporting Companies, their Beneficial Owners, and Company Applicants and authorizes FinCEN to share this information with U.S. and foreign government authorities and certain financial institutions for enforcement purposes.

CTA Compliance

Covered Entities

Generally, to qualify as a Reporting Company the entity must be a corporation, LLC, or some other type of entity created by the filing of a document with a secretary of state or similar office under the laws of a state or American Indian tribe (e.g., PLLC, LP, LLP, or LLLP).  A foreign company similarly registered to do business in the U.S. is also considered a Reporting Company.

The CTA also provides 23 exemptions, most of which cover companies that are already subject to federal oversight.  Some notable examples of exempt entities include banks and credit unions, securities brokers and dealers, investment companies and advisers, insurance companies, public accounting firms, tax exempt entities, and large operating companies (i.e., those with more than 20 full-time employees, over $5,000,000 in gross receipts or sales, and a physical office within the U.S.).  Subsidiaries of exempt entities are generally exempt as well.

Required Information

A Reporting Company must provide information about (a) itself, (b) its Beneficial Owners, and (c) in some cases, its Company Applicants.  A Beneficial Owner is any individual who, directly or indirectly, owns or controls 25% or more of the Reporting Company’s ownership interests OR exercises substantial control over the Reporting Company.  There are other more specific definitions and provisions for these requirements found in the CTA and/or its implementing rules. For more information on the mandated disclosures, Husch Blackwell’s CTA team has published a detailed guide to the CTA on its website.

The BOI report itself is filed electronically through the FinCEN filing system.  As part of the report, each individual must submit an image of his or her driver’s license or U.S. passport, or the individual can get a unique FinCEN identifying number which can be used for other reports going forward (the application for a personal FinCEN number is also filed online and the number is issued immediately upon filing).   The filing requirement for a BOI report applies even if the business closed or was dissolved in 2024.

Deadlines

If the Reporting Company was in existence before Jan. 1, 2024, then the BOI report for that entity must be filed before Dec. 31, 2024.

If the Reporting Company was created on or after Jan. 1, 2024, then the BOI report for the new entity must be filed within 90 days of its creation.  Any Reporting Company created on or after Jan. 1, 2025, must file the BOI report within 30 days of its creation.

After an initial report is filed, any changes to the information provided in such report must be updated on a new report within 30 days after the change occurred.

Noncompliance and Penalties

Severe penalties can apply to both individuals and the company itself for the willful failure to report the required information or the willful provision of false or fraudulent information on any BOI report.  Civil penalties can include fines up to $500 for each day the violation continues.  Criminal penalties can also apply, with up to $10,000 in fines and/or 2 years of imprisonment.

Legal Challenges and Political Realities

As one might imagine, the federal government’s novel move to create a national registry as proposed has been met with some resistance. Two federal lawsuits—one in Oregon and the other in Alabama—have resulted in contradictory opinions, with one court deciding in favor of plaintiffs challenging the CTA and another court taking up the government’s cause. If these decisions are affirmed by their respective appellate courts, the resulting circuit split could ultimately lead to the U.S. Supreme Court weighing in on the CTA’s constitutionality.  There is also a possibility that the CTA and/or its implementing rules could change after the new presidential administration and Congress take over next year.

In the meantime, through a release posted in March 2024, FinCEN stated that “FinCEN will continue to implement the Corporate Transparency Act as required by Congress” and that in its view “reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”

Conclusion

For those entities seeking to comply with the CTA and avoid potential legal liability, the time to act is now. They will need to quickly assess and identify their reporting requirements, get their BOI report filed with FinCEN prior to the year-end deadline, and then maintain their reported information on a go-forward basis. And, of course, they will need to monitor the CTA’s legal and political challenges as there could be changes to the law in the offing.

 

Garrett C. Reuter, Jr. is a partner with Husch Blackwell LLP. His practice includes advising business owners with various legal issues impacting their businesses, including tax concerns, ownership agreements, and business succession planning.  He also advises high-net-worth individuals and their families with complex estate and tax planning needs. He has office locations in Swansea, Ill. and St. Louis, Mo.