Corporate Transparency Act (“CTA”) was passed as a part of 2021 National Defense Authorization Act. CTA requires most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm, also known as FinCEN. By requiring these disclosures, Congress aimed to prevent financial crimes like money laundering and tax evasion, which
are often committed through shell corporations.
Pursuant to CTA, FinCEN issued a final rule on September 30, 2022. The rule went into effect on January 1, 2024. 87 FR 59498. The rule is also codified under 31 C.F.R. 1010.380. Significance of the CTA is that by January 1, 2025 most of the small and medium sized businesses are required to report information about their natural owners or face “$500 per day civil penalty and up to $10,000 in fines and 2 years in federal prison.” 31 U.S.C. 5336(h)(1). I.e. failure of medium and small sized businesses to report their ownership information can land owners with a 2-year prison term in a federal penitentiary! This is a big deal! Therefore please read on.
First and foremost, we need to go to the relevant CTA statute: 31 U.S.C. § 5336. Then, we need to figure out if the exemption applies. There are 24 categories listed under 31 U.S.C. § 5336(a)(11)(B). If one is a small/medium business, there is likelihood of no exemption.
Once no exemption is determined, then reporting requirement kicks-in. Reporting data includes information about so-called “beneficial owner.” Generally, beneficial owners are anyone who substantially controls* a reporting company, as well as anyone who owns or controls 25% or more of it. According to FinCEN, beneficial owners are defined as any “individual,” who via any means (written, understood, or in practice), either: (i) directly or indirectly “exercises substantial control over [an] entity” or (ii) directly or indirectly owns or controls 25% or more of an entity. 31 U.S.C. 5336(a)(3)(A).
*“Substantial control” has been promulgated and defined in FinCEN’s Small Entity Compliance Guide as “senior officers,” and “important decision-maker[s]” of the company. “Important decisions” include those about business, finances, and structure of the entity.
So what to report about beneficial owner? 31 U.S.C. § 5336(a)(1) says it is a full legal name, date of birth, current address, and identification number from a driver’s license, ID card, or passport. 31 C.F.R. § 1010.380(b)(1)(ii)(E) further says an image of the identifying document.
Where to report? Online at BOI E-Filing System.
Is this too much to ask from the Federal Government? Perhaps. In fact, federal court in Alabama held this law unconstitutional in National Small Business United v. Yellen. The case is now under appeal in the 11th Circuit.
Those business folks who won the National Small Business United v. Yellen case, no need to report for now (pending appeal), others have until January 1, 2025.
