It is crucial for small businesses to be aware of the new reporting requirements of the Corporate Transparency Act (CTA). The CTA requires small businesses to report certain information about ownership to the Financial Crimes Enforcement Network (FinCEN).
The application officially opened at the beginning of January this year. Businesses will have until January 1, 2025 to apply. It is also important for small businesses to stay abreast of new developments, so that they can apply in time and be compliant. This guide will help you prepare for the upcoming transition.
Understanding the Corporate Transparency Act
The Corporate Transparency Act requires smaller corporations and limited liability companies ( LLCs) to report certain beneficial ownership information. A beneficial owner is any person who owns 25% or more of a company or has substantial influence over decisions made by the company.
Businesses need to report this information to FinCEN, so that FinCEN can have access to this information. The main purpose of the CTA is to help prevent money laundering and other financial crimes. The CTA can help improve the transparency in corporate ownership and reduce financial crimes.
It is very important for companies to understand and comply with these new regulations. Companies that do not comply or provide misleading information can face financial penalties or even have to go to jail.
What is FinCen?
The Financial Crimes Enforcement Network is in charge of monitoring financial transactions in the United States.
FinCEN was created in 1990 to help analyze information under the Bank Secrecy Act (BSA) and ensure that companies comply with state, federal, and international laws.
The organization operates as a bureau within the U.S. Treasury, and its primary purpose is to combat money laundering, terrorism financing, and other financial crimes.
FinCEN is also responsible for ensuring that businesses comply with the new reporting requirements. In this role, it may disclose beneficial ownership information (BOI) to federal agencies for national security, intelligence, or law enforcement reasons.
New Reporting Requirements Passed in 2024
FinCEN created new reporting requirements for small businesses, which became effective in 2024. Businesses need to report their beneficial ownership information, even if they incorporated the business before 2024. They will also need to update information if they make any changes.
This new reporting requirement is for both US and non-US entities operating in the United States. Some of these entities include corporations, limited liability companies, limited partnerships, and other entities that file with the Secretary of State.
FinCEN recently provided an extension for businesses to file to give companies more time to become familiar with the new regulations. Companies will have until January 1, 2025, to file the beneficial ownership information (BOI) report. Newly formed companies will have 90 calendar days to file the report.
Court Case Against the CTA
In a significant legal challenge to the Corporate Transparency Act (CTA) and its Beneficial Ownership Information (BOI) reporting requirements, the National Small Business Association (NSBA) along with one of its members, Isaac Winkles, filed a lawsuit in November 2022, arguing that the CTA was unconstitutional.
On March 1, 2024, U.S. District Judge Liles C. Burke of the Northern District of Alabama ruled in favor of the plaintiffs, declaring the CTA unconstitutional. The court’s opinion stated that the Act exceeded the legislative powers of Congress, lacking a sufficient connection to any of its enumerated powers. However, this ruling was narrow, applying only to the NSBA, its members as of March 1, 2024, and Winkles, meaning that the majority of businesses were still expected to comply with the CTA’s requirements unless otherwise directed.
Following the Alabama ruling, the U.S. Department of Justice appealed the decision to the Eleventh Circuit Court of Appeals, signaling the government’s intent to uphold the CTA. As of now, the appeals process is ongoing, and FinCEN has continued to implement the CTA for non-plaintiffs, suggesting that the broader enforcement of BOI reporting remains in effect for most businesses.
The complexity of this legal battle was heightened when, on December 3, 2024, a Texas federal district court issued a preliminary injunction nationwide, temporarily halting the enforcement of the CTA. This injunction was overturned by the Fifth Circuit Court of Appeals on December 23, 2024, reinstating the reporting deadlines, but was subsequently vacated again by the same court on December 26, 2024, thereby reinstating the injunction.
Legal Outlook for BOI Reporting Requirements in 2025
Looking towards the future, the legal and regulatory landscape of the CTA remains highly volatile. The Fifth Circuit’s decision to vacate its own stay on the injunction points to continued legal contention over the Act’s constitutionality.
There are multiple cases challenging the CTA in various jurisdictions, including ongoing appeals and potential Supreme Court review, so the final fate of the BOI reporting requirements is uncertain. Businesses are advised to stay informed on judicial outcomes and any legislative changes, as the CTA could either be upheld, modified, or struck down comprehensively.
Moreover, while the ongoing legal battles create a temporary reprieve for some, the overarching expectation is that without a definitive ruling or legislative action, compliance with the CTA might still be required, urging entities to prepare for potential reinstatement of the reporting rules.
As a firm, we’re advising clients to comply with CTA at this time. Until the court reaches a final ruling, these requirements are technically the law of the land. Currently, the court ruling against the law only applies to members of the National Small Business Association who have been in the organization since March 2024.
Who is Affected by the Corporate Transparency Act?
All domestic businesses registered with any state’s Secretary of State must comply with the Corporate Transparency Act (CTA). This requirement also extends to foreign businesses that register with any state in the U.S.
However, businesses not registered with the state, such as sole proprietorships and general partnerships, generally do not fall under the CTA’s new requirements.
Large businesses that have more than 20 full-time employees and annual revenues exceeding $5 million may be exempt from these requirements, provided they have a physical office within the United States.
Certain companies that file reports with the Securities and Exchange Commission (SEC) may also be exempt from the CTA requirements.
This exemption could extend to other federally regulated companies, including banks, credit unions, investment advisors, insurance companies, public utilities, and similar entities.
Non-compliance with the CTA can lead to significant penalties. These can include daily fines of around $500, accumulating up to a total of $10,000. Additionally, deliberate provision of false information can result in imprisonment.
Do I Need to File a BOI Report If I don’t Have an LLC or Corporation?
If you do not have an LLC, corporation, or any other type of entity that falls under the definition of a “reporting company” as per the Corporate Transparency Act (CTA), you do not need to file Beneficial Ownership Information (BOI).
The CTA primarily targets business entities like corporations, limited liability companies (LLCs), and similar structures that are created by filing documents with a secretary of state or similar office. However, there are exemptions:
- Sole Proprietorships: Generally, sole proprietorships are not required to file BOI if they do not file with a state or tribal jurisdiction as a separate legal entity (like an LLC).
- Trusts: Most trusts do not need to report, unless they are statutory trusts or business trusts that are considered reporting companies.
- General Partnerships: In some states, general partnerships do not file with a state office, thus might not be required to report, but this can depend on state law.
- Certain Exempt Entities: There are 23 specific types of entities exempt from BOI reporting, including publicly traded companies, banks, credit unions, insurance companies, and various types of tax-exempt entities.
If your business structure is simply you operating under your own name without any formal legal entity formation, you are likely not subject to the BOI reporting requirements. However, if there’s any ambiguity about your business structure or if you’re unsure whether your business fits into one of the exempt categories, it might be beneficial to consult with a legal or tax professional. They can provide guidance tailored to your specific situation, especially considering the evolving legal landscape around the CTA.
How to Prepare for the New FinCen Requirements
Businesses must submit information about their beneficial owners under the new requirements, including names, DOBs, addresses, and tax ID numbers.
You must also report details about your company, such as its legal name, associated DBAs, and other pertinent info.
It’s 2024, so that means the new guidelines are here. Start collecting the necessary information now to ensure you’re ready when the time comes to report.
If you make a mistake in your filing, you have 30 days to file an amended report rectifying the error.
FinCEN recently released a small entity compliance guide and other resources t help business transition to the new reporting requirements.
There is no fee to apply for this report, but your company may benefit from hiring a professional to ensure that you are compliant when filing.
Navigating the Compliance Landscape
The new reporting requirements could create additional compliance tasks for small businesses, like reporting changes in beneficial ownership.
Initially, the new requirements are straightforward, but you have to keep up with it. You must notify FinCen of any changes in beneficiary ownership.
Small businesses should bring in an advisor to ensure they don’t run into compliance issue down the road.
Closing Thoughts
The Corporate Transparency Act will create additional legal and compliance work for many small businesses. Fortunately, FinCen recently pushed back the effective date by a year.
Applications just opened on January 1st, 20224, but the new requirements officially take effect in 2025. You could face stiff penalties if you don’t comply by the start of next year.
Legal challenges against BOI reporting requirements are ongoing, but we believe it’s in business owners’ best interests to maintain compliance with the law unless a more definitive court ruling is announced.
Small businesses should also monitor news from FinCEN to determine if there are any new requirements or changes announced in the coming months.
Our tax pros are already helping our clients get a jump start on the new FinCEN reporting requirements, and they can help you too! Slots are filling up fast for tax season 2024, so connect with a tax pro now for a one-on-one strategy session to see how much you can save on taxes this year.
