Editor's Note: This article was published on Nov. 1, well before a federal judge in Texas issued a nationwide injunction blocking its enforcement. The injunction from U.S. District Judge Amos Mazzant earlier this month, reported in the Dec. 4 issue of TBA Today, halts enforcement of the act while a challenge from the National Federation of Independent Business and several small businesses and nonprofits makes its way through the legal process. Mazzant called the law, which requires corporate entities to disclose the identities of their real beneficial owners to the U.S. Treasury Department's Financial Crimes Enforcement Network, an "unprecedented" attempt by the federal government to legislate in an area traditionally left to the states. The law, which is touted as an anti-money laundering tool law, directs the Treasury Department to collect and analyze submitted data to combat crime.

Small businesses play an essential role in the U.S. economy. Millions of small businesses are formed annually in the United States, accounting for a significant share of U.S. economic activity. The Small Business Administration estimates that there are over 33 million small businesses in the United States. These small businesses employ 61.7 million Americans — 46.4% of all private sector employees — and have created 62.7% of net jobs over roughly the past three decades.

In today’s business landscape, however, small businesses face challenges from fierce competition, shifts in consumer preferences, and challenges with the ever-changing legal environment. Among these, the Corporate Transparency Act and its new reporting requirements have introduced new compliance challenges which will affect over 32.6 million state-chartered businesses, most of which are small businesses.

Overview of the CTA

In 2021, Congress passed the Corporate Transparency Act (the CTA) with the goal of cracking down on misusing multi-layered shell companies to hide the identities of individuals engaged in illicit activities such as money laundering, terrorist financing, and financial fraud.¹ To achieve this goal, the CTA, which is neither a tax or accounting law, imposes new reporting requirements on certain covered companies to disclose information about their beneficial owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). After several delays, the CTA’s reporting requirements finally went into effect this year.²

What are the Reporting Requirements?

Generally, the CTA requires “reporting companies” to disclose certain information regarding business operations and their beneficial owners as part of the Beneficial Ownership Information Report (referred to as a “BOI Report”).

Among the required information, reporting companies must report their:

1. Full legal name.
2. Any trade name or “doing business as” name.
3. Principal place of business address.
4. Jurisdiction of formation.
5. Taxpayer identification number.³

In addition, the BOI Report must also disclose information for each of the company’s beneficial owners or company applicants, including the individual’s:

1. Full legal name
2. Date of birth
3. Current residential address and business address
4. Unique identification number from a passport or other government identification number
5. Image of the passport or other government identification number.⁴

Companies formed or registered after Jan. 1, 2024, will also have to report information regarding the “company applicant” — the individual(s) “primarily responsible for directing the filing of the creation or registration document,” even if that individual is the company’s accountant or lawyer. Company applicants who form entities during their business should report the business’s street address. A principal residence address should be used for other company applicants. This is a one-time registration for the company applicant. Note, however, that company applicants cannot be other companies or legal entities but must be individuals.

When is the Deadline To File a BOI Report?

To comply with the CTA, all “reporting companies” are required to electronically file their BOI Report by the following deadlines:

• Existing pre-2024 companies: Reporting companies created or registered before Jan. 1, 2024, must file their BOI Reports no later than Jan. 1, 2025.
• New companies formed in 2024: Reporting companies created or registered on or after Jan. 1, 2024, and before Jan. 1, 2025, must file their BOI Reports within 90 calendar days after receiving notice that their company’s creation or registration is effective.
• New companies formed after Jan. 1, 2025: Finally, reporting companies created or registered on or after Jan. 1, 2025, will have only 30 calendar days from actual or public notice that the companies’ creation or registration is effective to file their initial BOI Reports.

How Often Must a Business Report?

Fortunately, unlike annual reports with the Tennessee Secretary of State, BOI Reports will not be a yearly requirement. However, suppose there is any change to the information disclosed about each beneficial owner (or a change in beneficial ownership). In that case, reporting companies must promptly file an updated or corrected BOI Report — in most cases, within 30 days of the change occurring.⁵

What Are the Consequences of Noncompliance?

Compliance with these reporting requirements is critical, as the CTA establishes civil and criminal penalties for violations. Under the CTA, entities or individuals that willfully provide (or attempt to provide) false or fraudulent beneficial ownership information or willfully fail to report complete or updated information can be liable for civil penalties of up to $591 for each day the violation continues. There is no cap on the upward amount of this daily accruing penalty.⁶ Violators can also be subject to criminal penalties, including fines of up to $10,000 and up to two years of imprisonment.⁷ Depending on the circumstances, individuals — such as beneficial owners, senior officers, and company applicants — may be personally liable for civil or criminal penalties for non-compliance. Fortunately, the CTA contains a 90-day safe harbor period during which a company can correct an inaccurate report.

The severe legal repercussions for noncompliance, in addition to broader marketplace and business reputation concerns, show why it is essential for businesses to take proactive measures to understand and comply with the CTA’s requirements.

Confidentiality

The CTA also mandates that BOI Reports be treated as confidential and for law enforcement only. To that end, the CTA prohibits the unauthorized use or disclosure of BOI Report information.⁸ While filers can feel secure in the storage of their submitted information, they should also be wary to ensure that they are only submitting this information through the online FinCEN Beneficial Owner Secure System (BOSS) database. While the civil penalty for unlawful disclosures is the same as noncompliance, violators can face criminal penalties of up to five years of imprisonment and a fine of up to $250,000.⁹ If the unlawful disclosure or use occurs while violating another law or as part of a pattern of certain illegal activities, the violation could result in up to 10 years of imprisonment and up to $500,000 in fines.

Which Entities Are Affected?

The CTA requires all non-exempt “reporting companies” to file a BOI Report. Subject to certain exceptions, a “reporting company” includes any corporation, limited liability company, or similar entity created by filing a formation document with any state in the United States or any foreign company registered to do business in the United States.¹⁰ Under this broad definition of “reporting company,” the CTA lists 23 categories of exempt entities. Notable examples of entities that may be considered exempt include:¹¹

• “Large operating companies” in the U.S. with more than 20 full-time employees and more than $5 million in revenue
• Registered investment companies or investment advisers, broker-dealers and registered venture capital fund advisers
• Banks, credit unions and other financial market utility entities
• Accounting firms
• Tax-exempt entities (like nonprofits, political organizations and certain types of trusts) and entities assisting tax-exempt entities;
• Wholly-owned subsidiaries of certain exempt entities
• Inactive entities

Suppose an exempt company loses its exemption for any reason, such as by exceeding the employment and revenue threshold. In that case, it must file a BOI Report within 30 days from the date it no longer meets the criteria for any exemption.¹² Thus, even exempt companies must remain diligent in ensuring compliance with the CTA. Likewise, corporate affiliates cannot assume that the exemption applicable to one entity applies to its affiliated entities, such as a holding company. For instance, even when the CTA may allow subsidiaries to aggregate revenue for exemption purposes, the CTA does not permit companies to aggregate employee headcount.

Ultimately, the entities primarily exempt from the CTA’s reporting requirements, such as certain publicly traded entities, will tend to be more extensive and more heavily regulated.¹³ In other words, the CTA’s reporting requirements generally apply to smaller, more lightly regulated entities.¹⁴ As a result, small businesses will ultimately bear the primary burden of compliance under the CTA.

Who Are Beneficial Owners?

The BOI Report requires the disclosure of details about a reporting company’s business operations and personal information about any of its beneficial owners. For purposes of the CTA, a “beneficial owner” is any individual who owns or controls at least 25% of a company or otherwise exercises substantial control over the entity.¹⁵ Generally, an individual will have “substantial control” over a reporting company if they meet any of the four general criteria:

1. he individual is a senior officer.
2. The individual has the authority to appoint or remove certain officers or a majority of directors.
3. The individual has substantial influence over important decisions.
4. The individual has any other form of substantial control over the reporting company.¹⁶

Based on these broad terms, beneficial owners are essentially any individuals who directly or indirectly own or control a significant portion of the business entity both in the direct or traditional sense (i.e., by holding ownership interests like shareholders in a corporation or members in an LLC) and those individuals that indirectly have decision making authority. This definition could include individuals who hold ownership interests, whether through contracts, trusts, option agreements, warrants, nominee arrangements or other relationships.

Notably, as mentioned concerning company applicants, only individuals can be beneficial owners, not companies. However, to identify beneficial ownership, reporting companies owned or technically “controlled” by other entities must follow the line of control to the individuals that ultimately exercise substantial control over the reporting company and its parent entities.

Examples

As a hypothetical example, imagine that a reporting Company X is a subsidiary of Company Z, and individuals A and B are shareholders.¹⁷ Company Z has a 50% ownership interest in X, individual A has a 40% ownership interest, and individual B owns the remaining 10% of the outstanding shares in X. The president of Company X is individual C. Finally, 100% of the shares of Company Z are owned by individual D.

In this example, individual A is a beneficial owner because she owns 40% of the reporting company, X. Who else would be a beneficial owner of Company X? Company Z is not a beneficial owner of Company X because it is not an individual. However, individual D would be a beneficial owner of Company X because he is considered to indirectly control or own the reporting company by being the sole owner of Company Z. Individual C is likewise a beneficial owner as a senior officer of the reporting Company X. In contrast, individual B is an owner, he would not be considered a beneficial owner (unless he was a senior officer or had other authority) because he only owns less than 25% of reporting Company X.

While the above hypothetical may be easily understood, determining who owns or controls 25% or more of the ownership interests can become significantly more complex if multiple entities instead of individuals own the reporting company, if the parent entities are owned by various individuals/entities, or if there are different classes of stock with varying degrees of voting power or large amount of vested but unexercised stock options or other convertible instruments. Each individual’s ownership interest is calculated as a percentage of the reporting company’s total ownership interests. To illustrate briefly how the determination of beneficial ownership can quickly become more complicated, consider the scenarios below.

Imagine that individual D from the hypothetical above is not the only owner of Company Z. Instead, Company Z is owned by both individual D and another individual E, each of whom owns 50% of Company Z. Since Company Z owns 50% of the reporting Company X, individuals D and E each indirectly own 25% of X — meaning both of them must report as 50% beneficial owners of Company Z as well as 25% beneficial owners of the reporting company.

Alternatively, if individual D owned 60% of Company Z and individual E owned 40% of Company Z, individual D would indirectly own 30% of the reporting Company X while individual E owned only 20%. In this scenario, individual D would be a beneficial owner of the reporting Company X, but individual E would not.

Understanding and applying the definitions of beneficial owners and substantial control is essential to comply with the CTA’s reporting requirements. As shown in the above examples, determining beneficial ownership and substantial control can be nuanced, particularly for businesses with intricate ownership structures or multiple layers of ownership. Moreover, businesses, owners, officers and company applicants must maintain accurate and current beneficial ownership information.  Service providers that file BOI Reports or as Company Applicants should be very clear with clients regarding the continued filing requirements to avoid unintended liability. The ongoing monitoring of beneficial ownership may be complex and burdensome for businesses. Companies should be diligent about keeping effective record retention policies in place and information related to any changes in the business ownership and timely file any changes to mitigate potential penalties.

Implications for Business Operations

According to FinCEN estimates from its Federal Register publication in 2022, there will be approximately 32.6 million non-exempt “reporting companies” this year alone.¹⁸ Of these entities, FinCEN has acknowledged that the reporting requirements “would have a significant economic impact on a substantial number of small entities.”¹⁹

FinCEN estimates that CTA compliance will cost over $21.7 billion in the first year based on the assumption that the 32.6 million+ reporting companies each incur costs ranging from less than $100 for businesses with a “simple” structure and in the thousands for companies with “complex” structures. Unfortunately, however, the FinCEN cost estimates unrealistically assume that companies with a “simple” structure will not seek any professional guidance whatsoever and that even companies with a “complex” structure will incur minimal professional fees and may have their employees (not legal or tax professionals) bear the primary burden of compliance. As a result, we anticipate that the actual cost of compliance will far exceed FinCEN’s 2022 estimates.

Recent Court Challenges

Since 2021, when the CTA was passed, numerous small business advocates have raised concerns about the significant impact of the CTA reporting requirements on small businesses. One such challenge in Alabama has garnered much attention in recent months.

In Nat’l Small Bus. United et al. v. Yellen et al., first filed in November 2022, the National Small Business Association asked the U.S. District Court for the Northern District of Alabama to block FinCEN’s ability to enforce the CTA’s reporting requirements by arguing that it exceeds the constitutional limits of congressional authority.²⁰ In response, the U.S. Department of the Treasury has argued that the CTA is consistent with Congress’s power under the Commerce Clause, “incidental” to its taxing power, and its interest in combating money laundering and other illicit business activities.²¹ After considering the arguments, Trump-appointee District Judge Liles C. Burke entered a summary judgment order, finding the CTA unconstitutional because it cannot be justified as exercising Congress’s enumerated powers.²² Judge Burke suggested that while the legislators who drafted the CTA may have been pursuing “sensible and praiseworthy ends,” allowing Congress to use its taxing power to collect “useful data” would be a “substantial expansion of federal authority.”²³ As expected, the government promptly appealed to the 11th Circuit Court of Appeals, where the case remains pending as of this writing.

In the meantime, subsequent cases — all with the same named defendant, Secretary of the Treasury Janet Yellen — have popped up nationwide. Each jurisdiction has handled the cases differently. For instance, the Northern District of Ohio stayed a lawsuit seeking a nationwide injunction pending the outcome of the appeal in the 11th Circuit.²⁴ Conversely, in the Western District of Michigan, the court denied a preliminary injunction in which a newly filed organization asked the court to excuse it from complying by its April 2024 deadline.²⁵

Importantly, however, the NSBA v. Yellen ruling has a limited effect and only prevents enforcement of the CTA against the parties directly involved in the NSBA v. Yellen lawsuit — not any other companies across the country. Given the limited scope of the NSBA v. Yellen decision, FinCEN has clarified that the CTA’s reporting requirements will continue to be implemented and enforced.²⁶ As a result, most reporting companies, including small businesses in Tennessee, must comply with the CTA — at least for now.

Compliance Strategies and Best Practices

The CTA undoubtedly represents a significant change to small business operations, mainly since the burden of CTA compliance largely falls on small businesses. While more litigation involving the CTA can be expected, most small businesses in Tennessee will still be required to comply with the CTA. Therefore, to navigate the complexities of compliance, companies must begin implementing robust strategies to maintain and report their beneficial ownership information before the Jan. 1, 2025, deadline. These strategies may include conducting internal assessments to identify beneficial owners and implementing compliance programs tailored to the company’s needs.

As businesses adapt to the requirements of the CTA, it is critical to understand its implications and take proactive steps to ensure compliance, particularly for businesses with complex organizational structures that need to decipher the intricacies of beneficial ownership. |||

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COLTON ADAMS is an associate with Meridian Law with a focus on business and employment law, corporate governance and insurance matters.

LEAH BENNION is of counsel at Meridian Law and heads up Meridian’s Corporate and Securities Division with a focus on commercial transactions ranging from entity formation and conversion to development agreements and corporate taxation.

ERIC LYONS is a member at Meridian Law with a practice that focuses on insurance defense, breach of contract and commercial litigation.

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NOTES
1. The Anti-Money Laundering Act of 2020, which was part of the National Defense Authorization Act for FY2021, included the CTA. See Pub.L. No. 116-283 (H.R. 6395), 134 Stat. 338, 116th Cong. 2d Sess., §§ 6401-6403 of the NDA.
2. 31 C.F.R. § 1010.380(a)(1).
3. 31 C.F.R. § 1010.380(b)(1)(i).
4. 31 C.F.R. § 1010.380(b)(1)(ii).
5. 31 C.F.R. § 1010.380(a)(2).
6. 31 U.S.C. §§ 5336(h)(1), (h)(3)(A)(i); see also Federal Civil Penalties Inflation Adjustment Act of 1990, P.L. 101–410, as amended.
7. 31 U.S.C. § 5336(h)(3)(A)(ii).
8. 31 U.S.C. § 5336(h)(2).
9. 31 U.S.C. § 5336(h)(3)(B).
10. 31 U.S.C. § 5336(a)(11)(A). For the list of exceptions, see 31 U.S.C. § 5336(a)(11)(B).
11. For a more comprehensive list of exempt entities and the requisite criteria for meeting the exemptions, see 31 U.S.C. § 5336(a)(11)(B); 31 C.F.R. § 1010.380(c)(2). It is important that businessowners seek legal counsel to determine whether the requisite criteria are met before assuming that their business is exempt from the CTA reporting requirements.
12. 31 C.F.R. § 1010.380(a)(1)(iv).
13. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498, 59507 (Sept. 30, 2022).
14. Id.
15. 31 U.S.C. § 5336(a)(3)(A).
16. 31 C.F.R. § 1010.380(d)(1).
17. Note that the examples in this section assume no exemptions apply.
18. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498, 59549 (Sept. 30, 2022).
19. Id. at 59559, 59582.
20. Nat’l Small Bus. United v. Yellen, 133 A.F.T.R.2d 2024-885, 2024 WL 899372, at *1 (N.D. Ala. Mar. 1, 2024).
21. See id. at *20.
22. Id. at *21.
23. Id. at *1, 21.
24. Robert J. Gargasz v. Yellen, (N.D. Ohio Case No. 1:23-cv-02468) (filed on Dec. 29, 2023).
25. See Small Business Association of Michigan v. Yellen (W.D. Mich., Case No. 1:24-cv-00314) (filed Mar. 26, 2024).
26. Press Release, Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) (March 4, 2024), available online at: www.fincen.gov/news/news-releases/updated-notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448.