Articles & Alerts

In a recent development on March 1, 2024, the U.S. District Court for the Northern District of Alabama declared the Corporate Transparency Act (CTA) unconstitutional. The court’s ruling, however, is specific to the plaintiffs – members of the National Small Business Association (NSBA). The granted relief entails a prohibition on the federal government from enforcing the CTA against plaintiffs. Consequently, the ruling raises uncertainties regarding the overall impact and scope of this decision, particularly given its limited application to the plaintiffs. This is not a final decision, and we expect the federal government to appeal and request injunctions.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) was enacted on January 1, 2021 and went into effect on January 1, 2024. The law aims to improve transparency of ultimate beneficial owners of entities formed or registered to do business in the United States and addresses issues such as money laundering, terrorist financing, and other illicit activities. Additionally, the CTA was created to prevent the misuse of anonymous shell companies for illegal activities by increasing transparency and making it more difficult for criminals to conceal their identities. The law requires certain companies to disclose “beneficial ownership” information to the Financial Crimes Enforcement Network (“FinCEN”). Beneficial ownership refers to individuals who ultimately own or control a company, either directly or indirectly, and either exercise “substantial control” over the company or own and control at least 25% of the company’s ownership interests. By having access to the “beneficial ownership” information, law enforcement agencies and financial institutions will be better equipped to investigate and track illicit financial activities.

Filing Report Requirements and Exemptions

The requirement to submit reports extends to both domestic and foreign “reporting companies,” which are defined as follows:

1. Domestic reporting company: any entity that is a corporation, a limited liability company, or otherwise created by filing a document with a secretary of state or similar office.
2. Foreign reporting company: any entity created under the law of a foreign country and registered to do business in any U.S. state by filing a document with a secretary of state or similar office.

However, it’s important to note that the CTA exempts certain entities from the beneficial ownership information reporting requirement. Notable exemptions include:

• SEC-reporting companies
• Regulated financial services companies, including banks, credit unions, depository institution holding companies, registered securities broker-dealers, registered investment companies and investment advisers, venture capital fund advisers, and pooled investment vehicles that are operated or advised by the foregoing
• Insurance companies
• Public Company Accounting Oversight Board (PCAOB)-registered accounting firms
• Tax-exempt entities
• Inactive entities that existed before January 1, 2020, that are not engaged in active business, are not owned by a foreign person, have not had a change in ownership in the last 12 months, have not sent or received funds greater than $1,000 in the last 12 months, and do not hold any assets
• Entities that employ more than 20 full-time employees in the U.S., have an operating presence at a physical office in the U.S., and demonstrate more than $5 million in gross receipts or sales on their federal income tax return (excluding receipt/sales from sources outside the U.S.)

Filing Report Deadline

• New entities created in 2024 will have 90 days to file a report.
• Entities already in existence on January 1, 2024 have until January 1, 2025 to file a report.
• Entities that are created or registered in 2025 and beyond will have 30 days to file their reports.

Failure to comply with the CTA’s reporting requirements, which require a certification that the reported information is “true, correct, and complete,” may result in civil and criminal consequences. This includes a potential civil fine of up to $500 per day (capped at $10,000) and the possibility of imprisonment for a maximum of two years.

Updates to reports must be made within 30 days after there is a change to previously reported information or a reporting company becomes aware that previously reported information is inaccurate.

How are Foreign Entities Affected?

If a U.S.-owned foreign entity meets the above criteria, it may be subject to the reporting requirements of the CTA. The law aims to ensure transparency regarding beneficial ownership, regardless of the jurisdiction in which the entity operates.

Additionally, the CTA could impact foreign entities with investments or business operations in the U.S. These foreign entities and their foreign owners may be required to comply with the U.S. reporting requirements under the CTA if they meet the criteria specified by the law. The extent to which foreign entities are affected by the CTA depends on various factors, including the nature of their operations, ownership structures, and the thresholds set by the law.

Jurisdiction Parity with the CTA

New York State, for instance, has passed a similar law that would seek to publish the names of ultimate beneficial owners of these types of corporations. This bill is waiting for the Governor’s signature.

Anecdotally, a similar law was passed in the European Union (EU) in 2019 that was aimed at disclosing the identities of ultimate beneficial owners (UBOs) of opaque entities. In January 2023, the European Court of Justice (ECJ) struck down the law on appeal and ruled that the law conflicted with privacy rights established by the EU charter.

We recommend reviewing your entity structure with your legal counsel to determine if you may have a filing requirement.

Disclosure: This article is intended to inform you of the potential reporting requirement. Speak to your corporate secretary or legal counsel about this reporting requirement, as this is a corporate disclosure matter.