Are you a Reporting Company Under the New Corporate Transparency Act?
By Megan Todd, Senior Research Associate, University of Maryland, Agriculture Law Education Initiative
This article is not a substitute for legal advice.
On January 1, 2024, a new law went into effect that potentially impacts many formally organized farm and agricultural businesses, old and new. The federal Corporate Transparency Act (CTA) passed as part of the 2021 National Defense Authorization Act; it aims to identify businesses engaging in money laundering, illicit financial transactions, and financial terrorism.
To aid efforts to distinguish legitimate businesses from shell companies, the CTA established the Financial Crimes Enforcement Network (FinCEN) within the U.S. Department of Treasury to oversee a national registry of information on owners of businesses formed or operating in the United States. In total, FinCEN estimates that the CTA applies to 32.6 million currently existing entities, plus the expected 5 million new entities formed each year from 2025 to 2034.
Any business entity “… created by the filing of a document with a secretary of state or any similar office in the United States” must report to FinCEN. This includes LLCs, even those with a single member. FinCEN created an online portal for entities to file their BOIR. (https://boiefiling.fincen.gov/fileboir)
Per usual, some business types are exempt – including sole proprietorships, general partnerships, and nonprofits. The CTA exempts many other types of entities from its reporting requirements, including banks, insurance companies, and others believed to already be sufficiently regulated by state or federal government. Large operating companies - entities with more than twenty employees, five million dollars in gross revenue, and a physical office in the United States - are also exempt.
Existing businesses that are not exempt, a.k.a. reporting companies, have until January 1, 2025 to file a BOI report, to avoid civil and criminal penalties. Newly formed entities have 30 days from date they are notified that their business is registered to file a BOI report. Reporting companies must file beneficial ownership information (BOI) reports with information about: (1) the entity itself; (2) beneficial owners, and (3) in some cases, company applicants.
Information about the entity should include the full legal name of the company, trade names (DBAs), full address of principal place of business, and the Taxpayer Identification or Employee Identification Number.
Reporting entities must give FinCEN a Beneficial Owner or Applicant’s full legal name, date of birth, current address, and identification number from a driver’s license, ID card, or passport. § 5336(a)(1), (b)(2)(A). Under the final rule, reporting entities are also required to submit an image of the identifying document.
A beneficial owner is any individual who, directly or indirectly “exercises substantial control over the entity; or owns or controls at least 25% of the ownership interests” of the company, with some exceptions for minors, employees, creditors, and a few others. § 5336(a)(3).
There is no limit to the number of individuals who can be reported for exercising substantial control. For example, a senior officer of a company, including general counsel, and individuals who are important decision makers over business, financial, or governance matters would be considered beneficial owners.
Applicants are defined as "any individual who files an application to form a corporation, LLC, or other similar entity under the laws of a State or Indian Tribe; or registers [a foreign entity] to do business in the United States." 31 U.S.C. § 5336(a)(2).
If any of that information changes, the reporting company must update FinCEN, 31 U.S.C. § 5336(b)(1)(D). Updated reports are due within 30 calendar days after a change occurs. Corrected reports are due within 30 calendar days after the Reporting Company becomes aware (or has reason to know) of an inaccuracy.
Knowing or willful violations carry serious civil and criminal penalties. A willful provision of false or fraudulent beneficial ownership information or failure to report "complete or updated beneficial ownership information to FinCEN" by "any person" is punishable by a $500 per day civil penalty and up to $10,000 in fines and 2 years in federal prison.
Anyone who is a full or part owner of a business entity should determine if they are a reporting company under the CTA to ensure the required BOI report is timely filed.
For more details on reporting and a complete list of exceptions, see the Small Entity Compliance Guide on the FinCEN’s Beneficial Ownership Information website.
Constitutional Challenge to the CTA in the Northern District of Alabama
Shortly after FinCEN issued its final rule establishing the reporting requirements (Sep. 2022), the CTA was challenged in the federal District Court for the Northern District of Alabama by the National Small Business Association (NSBA), an Ohio non-profit representing over 65,000 businesses and entrepreneurs across the United States, and Isaac Winkles, an NSBA member and owner of two small businesses, one of which has 3 full-time employees and annual profit under $20 million.
The Plaintiffs sued the Treasury Department alleging that the CTA's mandatory disclosure requirements (1) exceed Congress' authority under Article I of the Constitution and (2) violate constitutional privacy protections. Plaintiff Winkles alleged that the CTA requires disclosure of "sensitive personal information to FinCEN for law enforcement purposes."
The Treasury Department’s argued that the CTA is within Congress' broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations. The basis of the argument is grounded in what are commonly called the Commerce Clause and the Necessary and Proper Clause, found in Article I of the Constitution.
Historically, Congress has broad authority to regulate businesses under the commerce clause, particularly for matters that involve interstate commerce, and the authority to use all means “necessary and proper” to execute its enumerated powers.
In a nutshell, the Northern District of Alabama’s Opinion, issued on March 1, 2024, held that the CTA is unconstitutional because it exceeds the limits of power granted to Congress. In other words, an entity filing papers of incorporation to form a business entity - an activity which is administered by states – does not qualify as an act of commerce. The decision on the commerce basis did not require the court to analyze the alleged privacy protection violations. The decision applies narrowly to the NSBA members only.
According to a March 4, 2024 Treasury Department press release, implementation of the CTA is still in effect outside of the Northern District of Alabama. The Treasury Department will likely appeal the decision. Other Reporting Companies should still take steps to report for FinCEN’s beneficial ownership database.
This article appears in November 2024, Volume 15, Issue 8 of the Agronomy News.