May 7, 2024

Important New Developments Regarding the Corporate Transparency Act

On January 1, 2024, the Corporate Transparency Act (CTA) became effective, thereby imposing significant new reporting requirements on more than 32,000,000 small businesses.

The stated purpose of the CTA is to expose illegal activities, including the use of shell companies and other opaque ownership structures to launder money and evade taxes. To help uncover such conduct, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has been charged with establishing a federal database of information furnished by “reporting companies” required to disclose Beneficial Ownership Information (BOI) about the individuals who own and control such entities. Database information will be accessible to certain federal agencies and state and local law enforcement authorities.

On March 1, 2024, the U.S. District Court for the Northern District of Alabama, in National Small Business United, d/b/a National Small Business Association, et al., v. Yellen, et al., ruled that the CTA is unconstitutional, finding that the legislation, including its BOI disclosure requirements, exceeds the Constitution’s limits on the powers of Congress.

Notably, the court enjoined the government from applying the CTA only to the plaintiffs in that lawsuit. Therefore, there is no nationwide injunction in effect.

Shortly after the court’s ruling, the Treasury Department issued a notice making clear that except for the plaintiffs in that lawsuit (essentially, the National Small Business Association and its members as of March 1, 2024), “all reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”

More recently, on March 11, 2024, the Justice Department filed a notice of appeal challenging the district court’s ruling. It will likely take many months for the appellate process, including a potential appeal to the U.S. Supreme Court, to yield a final decision in that case. Moreover, late last month, another lawsuit challenging the CTA was filed by the Small Business Association of Michigan in the U.S. District Court for the Western District of Michigan. Consequently, the CTA’s future is somewhat unclear.

In the meantime, what options are available to a “reporting company” currently subject to the CTA?

  • For business entities that existed prior to January 1, 2024, the deadline for complying with the CTA is December 31, 2024. Therefore, owners of such entities may wish to consider deferring the filing of BOI reports until later this year, in the hope that additional legal challenges to the CTA are successful, that Congress provides some relief, or that FinCEN adopts some useful changes or clarifications to its implementing regulations.
  • However, for business entities that were formed on or after January 1, 2024, the compliance clock is ticking. An initial BOI report must be filed on behalf of such entities within 90 days following the date of their formation under state law. Additionally, an “applicant” involved in the formation of such entities must, within that same 90-day period, submit the same information required of a beneficial owner.

Explore our recent article outlining the resources available to assist in complying with the Corporate Transparency Act.

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