According to the newly enacted Corporate Transparency Act (“CTA” ), more than 2,000,000 new business entities are formed each year in the United States under state laws; however, most states do not require identification of or personal information on the beneficial owners of the entities being formed.  As a result of the lack of details required by the states, some entities intentionally conceal their ownership in an effort to facilitate unlawful activity such as money laundering, terrorism, tax fraud, human trafficking, drug trafficking, counterfeiting, securities fraud, and foreign corruption.  To combat these various crimes, Congress enacted the CTA to enhance transparency through the mandatory reporting of beneficial ownership information (“BOI”).  Although the CTA was enacted in 2021, the mandatory BOI reporting requirements did not take effect until January 1, 2024.

In this three part CTA series we will discuss the state of the CTA at the time of publication of this article, how the CTA may effect your business and some general information regarding the reporting requirements.  Be sure to look for Parts II and III of the Series which will address in more detail who has to report and what specific information must be included to comply.

Challenges to the CTA

In November 2022, the National Small Business Association (“NSBA”) filed a lawsuit in a federal court in Alabama alleging that the mandatory disclosure requirement of the CTA is unconstitutional in that it exceeds Congress’ authority under Article I of the Constitution and violates the First, Fourth, Fifth, Ninth, and Tenth  Amendments.  On March 1, 2024, only sixty days after the CTA went into effect, the United States District Court for the Northern District of Alabama, Northeastern Division, held that the CTA is unconstitutional in that Congress exceeded its enumerated powers under the commerce clause.  The district court entered an order enjoining the United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”) from enforcing the CTA against the 65,000 members of the NSBA. 

The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal on March 11, 2024. While this litigation is ongoing, FinCEN has indicated that it will continue to enforce the CTA against approximately 32 million other covered companies that are not members of the NSBA as of March 1, 2024.

How does the CTA affect your business?

Subject to the NSBA case discussed above, many companies formed or operating in the United States, and many foreign companies doing business within the United States, will now be required to report information about their beneficial owners, and in some cases, their company applicants, to FinCEN.  The BOI reports (“BOI Reports”) must be filed electronically using FinCEN’s secure filing system.  The information reported will then be stored in a highly secure, confidential database.

Reporting companies created or registered to do business before January 1, 2024, will have until January 1, 2025, to file their initial BOI Reports.  However, reporting companies created or registered on or after January 1, 2024, and before January 1, 2025, only have 90 calendar days to file their initial BOI Reports.  Notably, the 90-calendar day deadline runs from the time the company receives notice that the company’s creation or registration is effective or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.  Beginning January 1, 2025, a newly formed reporting company will have only 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI Reports.  In addition to the initial reports, BOI Reports must be updated within 30 days of any change to beneficial ownership information.  This requirement to update includes the sale of a business or its assets, merger, acquisition, or death.  Moreover, once a reporting company becomes aware of or has reason to believe that inaccurate information was previously filed, the reporting company has only 30 days to update and correct the required information.

Failure to comply with the CTA can be costly for your Company.

The knowing or willful failure of a company to comply with the reporting requirements of the CTA or the knowing or willful provision of or attempt to provide a false or fraudulent BOI Report can result in costly penalties and possible imprisonment.  Specifically, any person that violates the reporting requirements of the CTA is liable to the United States for a civil penalty up to $500 each day that the violation continues or has not been remedied and may be fined up to $10,000, imprisoned up to 2 years, or both.   Senior officers that fail to file a required BOI Report can be held civilly and criminally liable for such failure.  For holding companies, conglomerates, and multi-layered companies, failure to comply with the CTA could result in separate violations and penalties for each separate entity that is noncompliant.The lawyers at Jordon Voytek will continue to monitor the development of this new area of law and are available to help your company navigate the complexities of the CTA and any future state laws addressing corporate transparency so that your entities can be in compliance with CTA and other applicable laws and regulations.  Jacquelyn Jordon Core and Michael T. Voytek are Founding Partners at Jordon Voytek. Jacquelyn and Michael focus their practice on mergers and acquisitions, and corporate structuring and restructuring, as well as general corporate advice and assistance.  Sandy Wilson is Of Counsel to Jordon Voytek.  She focuses her practice on labor and employment law and counseling.  They are available to assist businesses of all sizes with general counsel services, meeting their day-to-day legal needs. To contact them please contact Jacquelyn directly at Jacquelyn@JordonVoytek.com, or by phone at 304.777.0790, or contact Michael directly at Michael@JordonVoytek.com, or by phone at 203.360.6232, or contact Sandy directly at Sandy@JordonVoytek.com, or by phone at 304.276.1292.