The Uncertain Future of the Corporate Transparency Act: What You Need to Know

ARTICLE | April 09, 2024

The Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act for fiscal year 2021, is a significant piece of legislation aimed at enhancing business transparency and combating illicit activities such as money laundering and terrorism financing. It has introduced new reporting requirements for millions of entities, requiring them to disclose their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN). However, a recent ruling by a District Court judge has put these new requirements on hold, leaving the future of the CTA unclear.

Something new...

Under the CTA, domestic and foreign entities that have filed formation or registration documents with a U.S. state or Indian tribe are required to report their BOI. This includes corporations and limited liability companies (LLCs). However, there are 23 specified exemptions. Notably, large operating entities that employ more than 20 employees in the U.S., reported over $5 million in gross revenue or sales in the previous year’s federal income tax return, and have a physical office in the U.S. are exempt. Publicly traded companies registered under Section 102 of the Sarbanes-Oxley Act are also exempt.

The term 'beneficial owner' refers to any individual who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of the ownership interests of a reporting company. There is no maximum number of beneficial owners that must be reported.

Under the Act, reporting companies were required to provide a range of information about themselves and their beneficial owners. This included the company's legal name, any trade or DBA names, business address, state or tribal jurisdiction of formation or registration, and IRS Taxpayer Identification Number. For the beneficial owners, the company had to provide the full legal name, date of birth, address, and a unique identifying number from an acceptable identification document, such as a driver's license or passport, along with an image of that document.

The CTA had strict deadlines for reporting BOI. Entities created or registered before 2024 had to file their BOI report by Jan. 1, 2025, and those created or registered after 2023 had to file their BOI report within 30 days. If any changes occurred in the reported information or if errors were discovered in previously filed reports, a new report had to be filed within 30 days.

However, the CTA's future is now uncertain. In a recent ruling, District Court Judge Liles C. Burke declared the CTA as an unconstitutional exercise of Congress' enumerated powers. The reporting of BOI is currently on hold as further developments in this case are expected.

Non-compliance with the CTA, if it remains in effect, carries severe penalties. Civil penalties can amount to up to $500 per day that a violation continues, and criminal penalties can include a $10,000 fine and/or up to two years in prison.

The CTA represents a significant development in the fight against illicit activities and an important step towards greater business transparency. However, with its constitutionality now in question, businesses should keep a close eye on further developments regarding the Act and its reporting requirements.

If you need more information about the CTA and the BOI reporting requirements, you may consult the FinCEN website and their FAQ page. It's crucial to remain compliant with existing laws and regulations, so consider consulting with your legal counsel about these requirements, especially in light of the recent court ruling.