The CTA and FinCEN: A New Era of Business Reporting in the U.S.

ARTICLE | March 25, 2024

The Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act in 2021, has drawn significant attention from businesses nationwide. Designed to enhance business transparency and combat illicit activities like money laundering and terrorist financing, the CTA has established new reporting requirements for companies operating in the United States. However, recent legal challenges have brought the future of these requirements into question.

Under the CTA, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, was authorized to collect and disclose Beneficial Ownership Information (BOI). The CTA requires all domestic entities and foreign entities registered to do business in the U.S. to report their BOI. However, complexities surrounding reporting requirements and potential penalties for noncompliance have the business community on high alert.

Companies that fall under the scope of reporting include corporations, limited liability companies, and any entity created by filing a document with the secretary of state or similar office in the U.S. Certain exemptions exist, most notably the large operating company exemption, which generally applies to companies with at least 20 full-time employees, more than $5 million in gross receipts or sales, and an operating presence at a physical office within the U.S.

The BOI to be reported to FinCEN includes the legal name, any trade names, the current U.S. business address, jurisdiction of formation or registration, IRS taxpayer identification number, type of BOI filing, and specific information about each beneficial owner or company applicant. A beneficial owner is an individual who directly or indirectly exercises substantial control over the reporting company or owns or controls at least 25% of the reporting company’s ownership interests.

While these reporting requirements were set to be enforced starting January 1, 2024, a recent ruling by the U.S. District Court for the Northern District of Alabama on March 1, 2024, declared the CTA unconstitutional, citing Congressional overreach. The court's decision currently only applies to the plaintiffs of the case, which includes a small business owner and the National Small Business United, a trade organization.

In response to the court’s decision, FinCEN issued a statement indicating that it would not enforce the BOI reporting requirements against the plaintiffs but maintained that all other reporting companies are still subject to the mandate. Therefore, unless a business is a member of the National Small Business United, it must still comply with the reporting mandate.

The landscape of BOI reporting in the U.S. is in flux due to this recent ruling. Nevertheless, the majority of businesses are still required to file their initial BOI reports by January 1, 2025, if created before January 1, 2024. Companies created between January 1, 2024, and December 31, 2024, must file their initial BOI report within 90 days. Updates to previously reported BOI must be reported within 30 days.

Noncompliance with these requirements can result in severe penalties. A willful failure to comply with BOI reporting may lead to civil penalties of $500 per day and criminal penalties including a $10,000 fine and up to two years of imprisonment.

In this ever-evolving landscape, navigating the complexities of BOI reporting can be challenging. Businesses across the U.S. are advised to stay updated with the latest information and consult with legal counsel to ensure compliance with these requirements. As the debate surrounding the constitutionality of the CTA continues, it will be essential for companies to remain vigilant and prepared.