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The Corporate Transparency Act was enacted by Congress in 2021 to curb illicit finance activities including tax fraud, money laundering, and financing for terrorism, by non-transparent entities. The CTA was enacted to prevent individuals from hiding or benefiting from ownership of U.S. entities to facilitate illegal operations which affect national security and economic integrity.
Starting January 1, 2024 many companies must report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. The report need only be submitted once unless the company needs to update or correct information. It is estimated that the CTA applies to 32.6 million currently existing entities.
Companies required to report are called Reporting Companies. In general, a Reporting Company is a domestic or foreign corporation, limited liability company, or other entity that was created in the U.S. that registers with a U.S. state (such as the secretary of state) or Tribal Office and is not otherwise exempt. Reporting Companies may have to obtain information from their beneficial owners and report the information to FinCEN. Reporting Companies report beneficial ownership information electronically through FinCEN’s website at no cost.
Reporting Companies must provide their legal name and trademark, the current U.S. address of its main business site, their taxpayer identification number, and the jurisdiction where they were created or registered.
An individual qualifies as a beneficial owner if he or she directly or indirectly has a significant ownership stake in a company. The individual must either have a major influence on the Reporting Company’s decisions or operations, or own at least 25% of the company’s shares, or have a similar level of control over the company’s equity.
Although the scope of the CTA is quite extensive, twenty-three types of entities are exempt from beneficial ownership reporting requirements, including publicly traded companies, nonprofits, certain large operating companies, and inactive entities.
If a company was created or registered before January 1, 2024, it has until January 1, 2025 to report beneficial ownership information. If a company is created or registered in 2024, it must report beneficial ownership information within 90 calendar days after receiving actual or public notice that the company’s creation or registration is effective, whichever is earlier. If a company is created or registered on or after January 1, 2025, the beneficial ownership information must be filed within 30 calendar days after receiving actual or public notice that its creation or registration is effective.
In National Small Business United v. Yellen, 2024 WL 899372 (N.D. Ala. 2024) plaintiff Isaac Winkles and NSBU challenged the constitutionality of the Corporate Transparency Act shortly after it became effective. The NBSU is a group of 65,000 small businesses across the country. The District Court held the CTA “unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.” The District Court issued an injunction against enforcement of the CTA but only as applies to NSBU. The Justice Department appealed the District Court’s decision in March 2024, which appeal remains pending.
FinCEN published a statement that it will comply with the injunction and will not enforce the CTA against the plaintiffs in Yellen, but it will continue to implement the CTA as required by Congress, and Reporting Companies are still required to comply with the law and file beneficial ownership information.