Constitutional Challenge to Corporate Transparency Act Won’t Stop 2024 Reporting
On March 1, 2024, an Alabama federal court ruled that the Corporate Transparency Act (CTA) violates the Constitution’s Commerce clause by requiring nearly all U.S. small businesses to report information about their beneficial owners to U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). In National Small Business United v. Yellen, the Court enjoined the Department of the Treasury and FinCEN from enforcing the Act; however, the injunction only applies to the plaintiffs in the case, which include small business owner Isaac Winkles and members of the National Small Business Association (NSBA) as of March 1, 2024 (Joining the organization at this point will not result in an exemption.).
The Justice Department has filed a Notice of Appeal with the 11th Circuit Court of Appeals in Atlanta, so the issue remains unsettled, despite this first taxpayer victory.
Most Businesses Must Still Report
The CTA went into effect on January 1 and requires entities formed in 2024 to report beneficial owners within 90 days of formation. Businesses already in existence before January 1, 2024 will have until January 1, 2025 to file their reports. New companies created or registered with a state on or after January 1, 2025, will have 30 calendar days from the company’s creation or registration to file their initial reports (See FD prior coverage.).
It is important to note that only the plaintiffs who participated in the National Small Business case are exempt from reporting while the case winds through the courts. “Other than the particular individuals and entities subject to the court’s injunction, as specified below, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations,” FinCen said in a recent release.
Failure to file the required report can result in a $500 per day civil penalty and up to $10,000 in fines and 2 years in federal prison. There are exemptions for businesses in regulated industries and for large operating companies, but most businesses with $5 million or less in gross receipts and 20 or fewer employees will have to report if they were created by filing documents with a governmental authority (For example, sole proprietorships do not have to report.). One can see how the law is skewed toward small businesses. The NSBA estimates that more than 32 million existing companies and an additional 5 million newly-created companies per year will be subject to the CTA.
Who Is a Beneficial Owner?
According to FinCen FAQs, a beneficial owner is an individual who either directly or indirectly:
(1) exercises “substantial control” over the reporting company, or
(2) owns or controls at least 25% of the reporting company’s ownership interests. Examples of ownership interests include shares of equity, stock, voting rights or any other mechanism used to establish ownership.
Filing Procedure
Filing is done through an online portal on the Beneficial Ownership Information Report (BOIR) form. Reporting businesses must provide four pieces of information about each beneficial owner:
- name;
- date of birth;
- address; and
- the identifying number from a non-expired U.S. driver’s license, U.S. passport or other identification document issued by a governmental agency. If none of those documents exist, a non-expired foreign passport can be used.
The company also must submit information about itself, such as its name and address. In addition, reporting companies created on or after January 1, 2024, are required to submit information about the individuals who formed the company.
Businesses do not have to file each year. The report is submitted only once unless the information needs to be updated or the owners change. Updated reports are required within 30 days after a change occurs.
What Next?
The case could take more than a year to get through the 11th Circuit and then can be appealed to the Supreme Court. Statistics show that the average time from Notice of Appeal to final decision in the 11th Circuit is 9.6 months. The Circuit Court or the Supreme Court could delay the reporting requirement pending final review, but it is unclear whether this will happen.
At this point, the best path forward is for small businesses to assume they will have to report this year and to take steps to make that happen. Frazier & Deeter is watching these developments closely and will assist our clients in complying with the new law.