The below is merely informational and does not communicate, whether intentionally or otherwise, any legal, compliance or other advice.
As previously shared in our March 2024 article, The Corporate Transparency Act: A New Era For Business Reporting, January 1, 2025 marks a looming deadline for businesses to disclose “beneficial ownership information,” or BOI, to the Financial Crimes Enforcement Network (FinCEN). Congress passed the Corporate Transparency Act, or CTA, several years ago, as part of a larger raft of legislation aimed at curbing criminal financial activities within the U.S., including money laundering and funding in support for human trafficking and terrorism.
According to FinCEN, over 30,000,000 companies fall under the CTA’s reporting requirements. There is a good chance your business is one of them. With this in mind, here are a few important considerations as you and your business contemplate CTA compliance:
- When does my business have to file a BOI? If your company was formed before January 1, 2024, the deadline for filing a BOI is January 1, 2025. If your company was formed after January 1, 2024, the BOI report is due no later than 90 days of the formation date or the company.
- Does my business have to file a BOI? Under the CTA, and pursuant to FinCEN’s final rule, all “reporting companies” must file a BOI. Unless a business falls under an exemption to the CTA, if it is taxed as a C-Corp, S-Corp or partnership there is a greater probability that it will qualify as a reporting company and thus subject to FinCen’s BOI reporting requirement. Each business will need to make its own determination as to whether it qualifies as a reporting company.
- Does my business qualify for an exemption under the CTA? The CTA provides 23 potential exemptions to the BOI reporting requirement. As a general rule, these exemptions are purposefully narrow. However, the “large operating company” or LOC exemption, and the “subsidiary exemption” appear to have garnered the most attention, especially for smaller businesses. The LOC exemption centers on whether a business constitutes a “large operating company,” meaning any business (1) with an operating office within the U.S., that (2) employs over 20 full-time employees within the U.S., and (3) has reported for federal income tax purposes over $5 million in gross revenues (U.S.) for the prior year. Conversely, the subsidiary exemption focuses on subsidiaries and not parents or other affiliates of otherwise exempt entities, where the exempt entity must entirely control all of the ownership interests in the subsidiary. For more complex corporate arrangements, care will need to be taken as to whether given subsidiaries qualify for the exemption.
- Does my business need to file a BOI report if it dissolved and ceased operations in 2024? FinCEN has answered this question in the affirmative, even if the company is presently and irrevocably out of business.
- Where can my business file its BOI, and what must it include? FinCEN has provided guidance and filing options at https://fincen.gov/boi, together with the categories of information you will need to have at hand, which includes: (1) each beneficial owner’s name, date of birth, address, and acceptable identification document, like passport or driver’s license; and (2) essential reporting company information, including formation date, state of formation, legal name, trade name (if any), FEIN, address and more. The trickier part is determining who may constitute a beneficial owner under the CTA. The CTA most clearly identifies owners holding at least 25 percent of a company’s securities as persons who must be identified and reported. But for more complex organizations, thought should be given regarding the disclosure of members of the C-Suit (if different than the owners), key employees and managers who may wield considerable decision-making authority, and persons who may be able to exercise the independent ability to remove board members, officers and members of senior management, even if they do not hold a controlling block of shares or stock.
- What to do if a beneficial owner won’t provide needed information? The CTA’s reporting requirements are likely considered an unwelcome intrusion by most law-abiding persons within the U.S., who expect privacy in their affairs absent a warrant or other legal process. Companies may therefore find persons who qualify as beneficial owners reluctant to provide required information. Unfortunately, the CTA places the burden on the reporting companies to secure this information. And FinCEN prohibits the filing of incomplete reports, with potentially stiff civil and criminal penalties whenever a business fails to file. If a reporting company experiences trouble securing information, and to the extent feasible, the company and its other owners may consider changes to governing documents to mandate compliance, like resolutions, or amendments to existing articles, bylaws, shareholder agreements, or operating agreements.
- Where can my business file its BOI? FinCEN has provided guidance and filing options at https://fincen.gov/boi.
- What can happen if my business does not file? Non-compliance with the CTA carries potentially steep penalties. Amongst other liabilities specified for non-compliance, the CTA sets civil penalties of $500 per day, and criminal penalties can include imprisonment and fines up to $10,000.
- Can I avoid reporting in view of existing legal challenges to the CTA? The short answer is no. The CTA is and remains fully effective and enforceable, and is likely to remain so for the foreseeable future. There are three pending legal challenges to the CTA, in the Eastern District of Virginia, the District of Oregon, and the Northern District of Alabama. The courts in the Virginia and Oregon cases refused to enjoin the CTA, concluding it was likely a constitutional exercise of congressional authority. The Alabama decision held otherwise, although that decision remains applicable only locally. It may also prove suspect. The Eleventh Circuit Court of Appeals heard oral argument on the Alabama decision in September. While it has yet to issue its opinion, the general tenor of the Eleventh Circuit’s questioning indicates several key elements of the Alabama decision may not survive scrutiny.
The CTA’s requirements are stringent and compliance essential. Each business will need to undertake an independent evaluation of its operations and personnel to determine whether it constitutes a non-exempt reporting company under the CTA, and if it does, the beneficial owners and categories of information that it will need to disclose to FinCEN.
At Baker Jenner, we take the corporate health and wellbeing of our clients seriously. While we cannot tell you what to report or whether to report, we will be glad to assist in exploring options for supporting your company in undertaking BOI compliance. At Baker Jenner, we understand the challenges businesses face in an increasingly complex compliance environment. Contact us today at (404) 400-5955 or by clicking here to sit down and talk today.
Baker Jenner LLLP
