**ย IMPORTANT UPDATES TO THE ALERT BELOW **ย ย
- On December 3, 2024, in a lawsuit initiated by the National Federation of Independent Business (NFIB), the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction prohibiting the federal government from enforcing the Corporate Transparency Act (CTA). Texas Top Cop Shop, Inc., et al. v. Garland, et al., Case No. 4:24-cv-478 (E.D. Tex.). The Court held that the CTA was likely unconstitutional and that its implementation would irreparably harm reporting companies if they were forced to comply, stating that neither the Act nor its related regulations may be enforced and that reporting companies need not comply with the CTAโs January 1, 2025, BOI reporting deadline.
- On December 23, 2024, a panel of the U.S. Court of Appeals for the Fifth Circuit granted a stay of the district courtโs preliminary injunction, pending the outcome of the Department of the Treasuryโs ongoing appeal of the district courtโs order. FinCEN immediately issued an alert notifying the public of this ruling and, recognizing that reporting companies may need additional time to comply with BOI reporting requirements, extended BOI reporting deadlines.
- On December 26, 2024, a different panel of the U.S. Court of Appeals for the Fifth Circuit issued an order vacating the Courtโs December 23, 2024 order granting a stay of the preliminary injunction. Accordingly, as of December 26, 2024, the injunction issued by the district court is once again in effect and reporting companies are not currently required to file beneficial ownership information with FinCEN.
- On December 31, 2024, the Department of Justice (DOJ) filed an emergency request with the United States Supreme Court to remove the injunction against enforcement of the CTA, which the Fifth Circuit put back in place on December 26, 2024. The DOJโs arguments for a stay of the injunction center on the importance of allowing duly enacted laws to remain in effect, the likelihood of success on the merits, and the serious harm to the government and public that would result from the injunction.ย
- On January 7, 2025, in the case of Smith, et al. v. U.S. Department of the Treasury, et al., the U.S. District Court for the Eastern District of Texas issued an order enjoining the government from enforcing the CTA against the plaintiffs and staying FinCENโs regulations implementing the CTAโs reporting requirements.
- On January 23, 2025, the United States Supreme Court granted the DOJ’s motion to stay the nationwide injunction issued by the Fifth Circuit in the Texas Top Cop Shop case, which allows the CTA to be enforced while the courts weigh the merits of the case.ย In response, FinCEN posted an update on its website noting that, because a separate nationwide order issued by a different federal judge in the Smith case still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN while the Smith order remains in force.
- On February 5, 2025, the DOJ filed a notice of appeal of the district courtโs order in the Smith case and sought to stay that order as the appeal proceeds. In the interim, FinCEN has indicated that reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the Smith order remains in force.
- If the district courtโs order in the Smith case is stayed, thereby allowing FinCENโs Reporting Rule to come back into effect, FinCEN has announced that it intends to extend the reporting deadline for all reporting companies 30 days from the date the stay is granted and, during that 30-day period, it will assess options to modify further deadlines or reporting requirements for lower-risk entities, including many U.S. small businesses, while prioritizing reporting for those entities that pose the most significant national security risks. For additional updates, go to https://www.fincen.gov/boi.
December 8, 2023 – A federal law takes effect on January 1, 2024 that will impose new reporting requirements on most closely-held corporations, limited liability companies and limited partnerships. Are you prepared to comply with the new requirements?
Overview
In 2021, Congress enacted the Corporate Transparency Act (โCTAโ) on a bipartisan basis as a part of the Anti-Money Laundering Act of 2020 (AMLA 2020), which is intended to combat the use of U.S. shell companies for money laundering, terrorism financing, and other financial crimes.
The CTA requires all โreporting companiesโ to report certain personal information about its “beneficial owners” to the U.S. Treasury Departmentโs Financial Crimes Enforcement Network (โFinCENโ).
- A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025 to file its initial beneficial ownership information (“BOI”) report.
- A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the companyโs creation or registration to file its initial BOI report. This 90-calendar day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.
- Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the companyโs creation or registration is effective to file their initial BOI reports with FinCEN
The CTA report must be filed with FinCEN using their secure electronic filing system on their website. There is no fee for submitting a BOI report to FinCEN.ย Beneficial ownership information reported to FinCEN is stored in a secure, non-public database accessible by Federal and state law enforcement agencies, officials at the Department of the Treasury, and other authorized agencies.
Once the reporting company files their initial BOI report with FinCEN, such reports must be updated within 30 days of the following events:
- a change to the โbeneficial ownersโ (e.g., through the sale of a business, merger, acquisition, or death)
- a change to previously reported information (e.g., changes to the entity name or any trade name (DBA) used by the company, or changes to the entityโs principal place of business), or
- becoming aware of or having reason to know of inaccurate information previously filed.
What is a Reporting Company
Domestic and foreign companies are required to report to FinCEN unless an exemption applies. Domestic companies are defined in the CTA as corporations, limited liability companies or any other entity created by the filing of a document with their respective secretary of state or any similar office under the law of a state or Indian tribe. A foreign reporting company is defined in the CTA as a corporation, limited liability company, or other entity formed under the law of a foreign country and is registered to do business in any U.S. state or Tribal jurisdiction by filing a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.
While there are 23 listed exemptions from being considered a โreporting company,โ most closely-held entities are generally subject to the reporting requirements unless they are (i) publicly traded, (ii) a nonprofit, or (iii) satisfy the large operating company exemption which applies to entities that (A) have more than 20 employees in the United States, (B) have a physical office in the United States, and (C) filed a federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales.ย A full list of all 23 types of organizations that are exempt can be found at 31 CFR ยง 1010.380(c)(2).
There is also an exemption for โinactive entitiesโ that meet all of the following requirements:
- Were in existence before January 1, 2020
- Are not engaged in active business
- Have no ownership held by a foreign person
- Have had no change in ownership in the last 12-month period
- Have not sent or received funds over $1,000 within 12-month period, and
- Do not hold any type of assets.
Who are Beneficial Owners of a Reporting Company
โBeneficial ownersโ for whom personal information must be reported includes all individuals who own or control at least 25% of the ownership interests of a reporting company, or who exercise “substantial control” over a reporting company.ย C-suite executives and LLC managers are deemed to have substantial control.ย Exercising substantial control or owning or controlling ownership interests may be direct or indirect, including through any contract, arrangement, understanding, relationship, or otherwise.
Generally, if a corporate entity owns or controls 25 percent or more of the ownership interests of the reporting company, such a reporting company reports the individuals who indirectly either (1) exercise substantial control over the reporting company or (2) own or control at least 25 percent of the ownership interests in the reporting company through the corporate entity. Absent limited exceptions, it should not report the corporate entity that acts as an intermediate for the individuals.ย FinCENโs Small Entity Compliance Guide includes additional information about these special reporting rules (see Chapter 4.2, โWhat do I report if a special reporting rule applies to my company?โ).
Beneficial owners can also own or control a reporting company through trusts, either by exercising substantial control over a reporting company through a trust arrangement or by owning or controlling the ownership interests of a reporting company that are held in a trust.ย Particular facts and circumstances determine whether specific trustees, beneficiaries, grantors, settlors, and other individuals with roles in a particular trust are beneficial owners of a reporting company whose ownership interests are held through that trust.ย Generally, the following conditions indicate that an individual owns or controls ownership interests in a reporting company through a trust:
- a trustee (or any other individual) has the authority to dispose of trust assets;
- a beneficiary is the sole permissible recipient of income and principal from the trust, or has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
- a grantor or settlor has the right to revoke the trust or otherwise withdraw the assets of the trust.
Special rules also apply if a reporting companyโs ownership interests are owned or controlled through a trust arrangement with a corporate trustee.ย The reporting company may, but is not required to, report the name of the corporate trustee in lieu of information about an individual beneficial owner only if all of the following three conditions are met:
- the corporate trustee is an entity that is exempt from the reporting requirements;
- the individual beneficial owner owns or controls at least 25 percent of ownership interests in the reporting company only by virtue of ownership interests in the corporate trustee; and
- the individual beneficial owner does not exercise substantial control over the reporting company.
What Information Must Be Reported
Generally, for each individual who is a beneficial owner, a reporting company will have to provide the following information:
- The individualโs name;
- Date of birth;
- Residential address; and
- An identifying number from an acceptable identification document such as a passport or U.S. driverโs license, and the name of the issuing state or jurisdiction of identification document (for examples of acceptable identification, see Question F.5). The reporting company will also have to report an image of the identification document used to obtain this identifying number.
When a beneficial owner or company applicant has obtained a โFinCEN identifier,โ reporting companies may report the FinCEN identifier of that individual in the place of that individualโs otherwise required personal information on a beneficial ownership information report.ย A โFinCEN identifierโ is a unique identifying number that FinCEN will issue to an individual or reporting company upon request after the individual or reporting company provides certain information to FinCEN.
It is the responsibility of the reporting company to identify its beneficial owners and company applicants, and to report those individuals to FinCEN. At the time the filing is made, each reporting company is required to certify that its report or application is true, correct, and complete.ย FinCENโs Small Entity Compliance Guide includes a checklist to help identify the information required to be reported (see Chapter 4.1, โWhat information should I collect about my company, its beneficial owners, and its company applicants?โ).
Penalties for Non-Compliance
A person who willfully violates the BOI reporting requirements may be subject to civil fines of up to $500 for each day that the violation continues. However, this civil penalty amount is adjusted annually for inflation (for 2024, this amount is $591).ย A person who willfully violates the BOI reporting requirements may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000.
Potential violations include willfully failing to file a beneficial ownership information report, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information.
Both individuals and corporate entities can be held liable for willful violations. This can include not only an individual who actually files (or attempts to file) false information with FinCEN, but also anyone who willfully provides the filer with false information to report. Both individuals and corporate entities may also be liable for willfully failing to report complete or updated beneficial ownership information; in such circumstances, individuals can be held liable if they either cause the failure or are a senior officer at the company at the time of the failure.
Additional information and FAQs regarding the CTA reporting requirement is available on the FinCEN website.ย If you have any questions regarding the CTA or would like assistance complying with the CTA reporting requirements, please do not hesitate to contact the Corporate and Business Law group at McCandlish & Lillard.