Small business owner? Prepare for compliance with new “wise but unconstitutional” Corporate Transparency ActMarch 14, 2024

Attention Small Business Owners: The enactment of the Corporate Transparency Act (CTA) marks a significant shift in the regulatory landscape for businesses across the United States. This pivotal piece of legislation, primarily aimed at combating financial deception such as money laundering and tax evasion, requires a clear disclosure of beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Understanding and adhering to these rules is crucial, as noncompliance could lead to substantial penalties.

As a small business leader, you are now responsible for submitting a Beneficial Ownership Information (BOI) Report. This means providing FinCEN with accurate details about who ultimately owns and controls your company including personal details on the identity of such parties, including for example, board members. Missing the deadline, or submitting incomplete or inaccurate information could trigger severe fines. In some cases, deliberate noncompliance could result in imprisonment.

However, the CTA isn’t a blanket requirement. It thoughtfully considers existing regulatory frameworks, offering exemptions to categories of entities that already face stringent federal reporting obligations. Notably, for large operating companies and certain subsidiaries, exemptions may apply, but the criteria are nuanced.

Exemptions for Large Operating Companies

The exemptions for large operating companies extend to those meeting specific employment, revenue, and operational premises criteria:

• Employment of more than 20 full-time employees in the US.
• Gross receipts or sales exceeding $5,000,000 domestically, as reported on the previous year’s tax return.
• A physical business presence within the US that is more than just a mailing address.

It’s important to review these criteria carefully, as meeting them could mean your business is not required to file the BOI Report.

Privileges for Subsidiaries

Subsidiaries controlled or wholly owned by an exempt entity may also bypass this reporting process. Particularly, subsidiaries of exempt entities (such as certain investment companies, insurance companies, and public utilities) could find relief from CTA requirements if maintained as 100% ownership.

Nevertheless, there are caveats. For example, a subsidiary only partly owned by an exempt entity or by a collective of entities that includes non-exempt ones will still be required to report.

Constitutionality

On March 1, 2024, the Corporate Transparency Act met a judicial roadblock in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), when an Alabama federal court declared the legislation unconstitutional, preventing the Department of the Treasury and FinCEN from enforcing it against the plaintiffs. In the opinion, the Court states that: “the wisdom of a policy is no guarantee of its constitutionality. Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.”

The government has since appealed the decision. Despite this standoff, FinCEN continues to enforce the Act for all others not protected by the ruling. The exempted parties, including Isaac Winkles, specific reporting companies, and members of the National Small Business Association as of March 1, 2024, are temporarily relieved from reporting obligations. At the moment, all other companies must still comply with FinCEN’s directives and file beneficial ownership information as required.

Penalties for Noncompliance

An essential reminder for those who might inadvertently or willfully neglect their reporting duties: the consequences are not to be taken lightly. Failure to report can yield civil penalties of up to $500 per day. More gravely, criminal charges include potential imprisonment and monetary fines up to $10,000.

In closing, understanding the scope and implications of the Corporate Transparency Act is indispensable for your business’s operational integrity and legal compliance. While the CTA introduces new layers of complexity, it ultimately serves to foster a transparent business environment that benefits the economy at large.

For a deeper dive into the specifics of the CTA, including comprehensive reporting requirements, exemption categories, and compliance timelines, refer to the FinCEN website or reach out to us for further guidance. We will continue to follow this case through the appeal process. Remaining informed is the first and most crucial step toward ensuring your business steers clear of regulatory pitfalls.

Cassie J. Edgar, Patent Attorney and Chair of the Regulatory Law practice group, advises clients in intellectual property, regulatory law, crisis management, compliance, stewardship, lobbying, and matters with USDA, FDA, EPA, and FTC. Cassie is also Co-Chair of the Data Privacy and Cybersecurity practice group. For additional information, please visit MVS or contact Cassie directly via email at cassie.edgar@ipmvs.com.

The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of McKee, Voorhees & Sease, PLC, any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.