Overview
The Corporate Transparency Act (CTA) filing requirements have been reinstated and most filings will now be due January 13, 2025 instead of the December 31, 2024 prior deadline. The bottom line is that any entity classified as a “reporting company” under the CTA has to file with the Financial Crimes Enforcement Network of the Treasury (FinCEN). Each reporting company will have to file Beneficial Owner Information (BOI) for each person deemed a beneficiary owner (BOs). While a detailed discussion of the legal arguments in the cases challenging the CTAs constitutionality, and the counter arguments by the government would be interesting, that will not help those required to report to address that requirement.
A Bit of Background
Reporting companies include closely held business entities whether they be limited partnerships (LPs), limited liability companies (LLCs), S corporations, other corporations unless they are specifically exempt. FinCEN has made the requirements broad and complex and even includes entities that might be inactive or terminated.
Beneficial Owners include anyone who owns 25% or more of a reporting company or who has “substantial control” over an entity. The definition of “substantial control” is both broad and vague so that many people who are officers, directors, managers, key employees, etc. of a reporting company may have to provide information to the reporting company to report them as a BO. If a trust owns or controls interests in a reporting company, the filing requirements become exponentially more complicated and many or all people named in fiduciary and other capacities in the trust may have to provide BOI information to the reporting company.
Should You File Now?
Might the courts eventually find the CTA unconstitutional? Might the Trump administration curtail or try to eliminate the CTA? Failing to file is a risky gambit in that penalties are about $600/day per infraction and two years of jail time is even permitted under the statute. It seems that many people deferred filing hoping the CTA would be held invalid. That has proven to be less than a wise decision as filings now have to be completed by most reporting companies by January 13, 2025. The real questions is whether the hassle and cost of filing, and putting private and confidential information into the CTA database, outweigh the risks of being in violation of the CTA and potentially incurring monetary fines and perhaps jail time. Given the uncertainty of all of this, and the limited time period into which to file, filing as required seems to be the prudent course of action if that has not already been done.
What Did FinCEN Say About the Recent Court Developments?
FinCEN issued a press release about the recent court developments which is reproduced below with some annotations. Many professional firms have been emailing their mailing lists this information to be sure everyone is informed of FinCEN’s position.
In light of a December 23, 2024, federal Court of Appeals decision, reporting companies, except as indicated below, are once again required to file beneficial ownership information with FinCEN. However, because the Department of the Treasury recognizes that reporting companies may need additional time to comply given the period when the preliminary injunction had been in effect, we have extended the reporting deadline as follows:
• Reporting companies that were created or registered prior to January 1, 2024 have until January 13, 2025 to file their initial beneficial ownership information reports with FinCEN. (These companies would otherwise have been required to report by January 1, 2025.)
• Reporting companies created or registered in the United States on or after September 4, 2024 that had a filing deadline between December 3, 2024 and December 23, 2024 have until January 13, 2025 to file their initial beneficial ownership information reports with FinCEN.
• Reporting companies created or registered in the United States on or after December 3, 2024 and on or before December 23, 2024 have an additional 21 days from their original filing deadline to file their initial beneficial ownership information reports with FinCEN.
• Reporting companies that qualify for disaster relief may have extended deadlines that fall beyond January 13, 2025. These companies should abide by whichever deadline falls later.
• Reporting companies that are created or registered in the United States on or after January 1, 2025 have 30 days to file their initial beneficial ownership information reports with FinCEN after receiving actual or public notice that their creation or registration is effective.
• Plaintiffs in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.)—namely, Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024)—are not required to report their beneficial ownership information to FinCEN at this time.
On Tuesday, December 3, 2024, in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.), the U.S. District Court for the Eastern District of Texas, Sherman Division, issued an order granting a nationwide preliminary injunction. On December 23, 2024, the U.S. Court of Appeals for the Fifth Circuit granted a stay of the district court’s preliminary injunction enjoining the Corporate Transparency Act (CTA) entered in the case of Texas Top Cop Shop, Inc. v. Garland, pending the outcome of the Department of the Treasury’s ongoing appeal of the district court’s order. Texas Top Cop Shop is only one of several cases that have challenged the CTA pending before courts around the country. Several district courts have denied requests to enjoin the CTA, ruling in favor of the Department of the Treasury. The government continues to believe—consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon—that the CTA is constitutional. For that reason, the Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal on December 5, 2024 and separately sought of stay of the injunction pending that appeal with the district court and the U.S. Court of Appeals for the Fifth Circuit.
What Does the FinCEN Announcement Mean?
Simply put FinCEN is not backing down and wants filings made. Because there was a brief period of time when those required to report may have reasonably understood that the reporting might not be required. FinCEN has provided a brief extension of the filing deadline for most reporting companies from January 1, 2025 to January 13, 2025. That is not going to be much reprieve for those required to file that have not even began the process of evaluating their filing requirements and collecting the relevant information to complete a filing. What this also seems to suggest is that FinCEN is “sticking to its guns” and insisting on filing pretty much in accordance with the rules that existed before the court cases may have raised hopes that the CTA might disappear. So, as noted above, it really seems that anyone who has not yet filed that may have to, should do so.
Fifth Circuit Court’s View
The Fifth Circuit included the following explanation in its opinion justifying determining that the stay was appropriate:
“When balancing this harm against the public’s urgent interest in combatting financial crime and protecting our country’s national security, equity favors a stay. As the government explains, and the district court recognizes, a last-minute nationwide preliminary injunction would undermine our ability to push other countries to reform their anti-money laundering and counterterrorism regimes and to address the most fundamental gap in our own regime.
The Real Issue is Reporting Should be Easier
What is missed in the above perspective, at least in this author’s opinion, is that assuming that there is a justifiable governmental need to collect information about entities and the people that own or control them to combat financial crime, the rules and process could have, and should be, handled in a more intuitive, less complex, and more practical manner:
· The law and its explanations could have and should be far more concise and simpler. The government seems to have forgotten the implications of such voluminous regulatory details on a typical small business. The complexity of applying the CTA when a trust owns or controls part of a business are unclear and unfairly complicated. The need to report for a business entity that has had no business operations for years because it was not formally dissolved is unfair. The list goes on. While some desired filings or reported information may be missed by the government there seems not to have been a balancing of the government’s desire for every shred of reporting information versus the complexity created for average small business entities.
· Many people are not technologically adept enough to deal with the FinCEN website. What are they supposed to do?
· Good faith exceptions from penalties and certainly and especially jail time should be provided. An innocent business owner trying to comply with the CTA should not face the specter of such onerous punishment.
· Provisions should have been made to address the practical challenges some business entities may face in locating those required to file or provide information (e.g., someone named as an officer or director of a corporation decades ago who cannot be located), or if someone required to provide a reporting company information simply refuses to do so. Why cannot the name and whatever other information is available be reported and the responsibility for missing information passed to the person refusing to cooperate?
· The 30-day deadline is onerous and will be difficult for many people to meet.
· Online explanations and tips should accompany each line item on the CTA reporting website.
· Online chat/help and other features should have been funded.
· The compliance could have been simplified. As an option entities should have an additional CTA form merely added to entity income tax returns to be filed as part of the income tax reporting process would have made the entire process less burdensome and capable of being handled by most entities as part of the routine income tax reporting that everyone is familiar with.
· The design and functionality of the FinCEN website for CTA reporting should be more intuitive and easier to work with. Error notices should be clearer and more precise and identify the particular issue that was triggered. They often don’t. The layout and design of the reporting pages is often not intuitive.
· If a particular item of information cannot be located by the filer there should be some arrangement to file the information that is available to facilitate good faith compliance.
Intelligent, law-abiding business owners and others should not have to struggle with the incredible complexity and issues the CTA has imposed, nor should they feel forced to hire professional advisers to interpret and apply what should be a straightforward reporting process. Perhaps the public and professional advisers would be less upset by the CTA if it could be better and more reasonably handled.
Steps to Make Your Filing Easier
The following approach might help make it easier for you to complete your required CTA filings.
Step 1: Set up a template or “cheat sheet” to record all the information you will need for filings. In this way, when you actually begin to complete the filings for each Reporting Company it will be much easier and more efficient. You’ll also have a record of information to know if in the future you have to amend a report.
If you are going to assist other Beneficial Owner’s you will need their full legal name, Social Security Number, home address, birthdate, identification, etc.
For each Reporting Company you should obtain a copy of the legal document (certificate) that was used to form the entity. That should be a copy of the document accepted for filing by the state so that you have the correct date of formation, etc. You will also need the Tax Identification Number for the entity, physical business address, etc.
If you collect all the necessary information before you start to file the filing process will be much easier and quicker. Don’t start to file to then collect the necessary information.
Also, set up a file folder on your computer to store your memo and key legal documents you’ll need. That way you have everything accessible before you begin actual filings. Save the various receipts you receive from filing with FinCEN. Be certain that the laptop is backed up, encrypted, and that you have all appropriate cybersecurity protections, especially if you are holding confidential information for other Beneficial Owners.
Step 2: Identify each Reporting Company for which you are legally or practically responsible to assure that the CTA filing is made. For each Reporting Company identify every Beneficial Owner that will be required to provide Beneficial Owner Information (BOI). These decisions are often not simple or obvious but are not the subject of this article. The FinCEN Small Entity Compliance Guide and the FAQs posted by FinCEN to its website. Unfortunately, that information is voluminous and to get the decisions made, information gathered, and filings completed by January 13 it may be best to hire a professional familiar with rules if you cannot reach conclusions on filings quickly.
Step 3: Consider the approach of every Reporting Company obtaining a FinCEN Identifier Number for every Beneficial Owner whose information they have to report. That approach simplifies the process for Reporting Companies as the only information they will generally need to input is the entity’s basic information and the FinCEN Identifier number for each Beneficial Owner. The Reporting Company can avoid having to have a copy of the Beneficial Owner’s driver’s license, home address, and other confidential information. That will make it safer as then that data is not in the Reporting Company’s possession to risk hacking or other loss. The Beneficial Owner will often be more comfortable not submitting that information to the Reporting Company. Also, and this is quite important, if any Beneficial Owner’s information changes (e.g., new driver’s license, move to a new home address, etc.) the onus of updating that information is on the Beneficial Owner, not on the Reporting Company. If you take this approach contact each Beneficial Owner and have each obtain their own FinCEN Identifier Number and provide it to the Reporting Company. On the FinCEN website it says: “A FinCEN ID is a unique identifying number issued to an individual by FinCEN. Although there is no requirement to obtain a FinCEN ID, doing so can simplify the reporting process.”
Step 4: Have every Beneficial Owner obtain a FinCEN Identifier Number. Before getting started be sure to have a PDF of your driver’s license and if you don’t have a driver’s license a passport or sufficient state identification card. If you don’t have a PDF you might be able to take a photograph with your smart phone and convert that .jpg file to a PDF. To convert a .jpg photograph to a PDF you may have an app on the phone you can use or you can purchase a third-party app that will make the conversion. Search online for the phone you have as to how to do this.
If you don’t already have a login.gov account set one up. Search for login.gov or access the link on the FinCEN website:
Enter your email address. You will get an email from login.gov to confirm your email address. Do that. Then set up a password. Be sure to save it someplace secure. This password should not be given to the Reporting Company you have to provide information to. Set up multi-factor authentication (MFA).
The FinCEN website says: “To obtain a FinCEN ID for yourself, click the Create Account button to create an account and begin the application for a FinCEN ID. If you already have an account, login in to enter your identifying information on the FinCEN ID application.”
Once your login.gov account is set up, and you have the PDF of your identification, go to the FinCEN website section for filing a BOI report. On right side of screen click on “Create Fin Cen ID.” Apply to get your FinCEN Identifier Number.
Do the above for each of Beneficial Owner.
Once you have a FinCEN identifier for each Beneficial Owner, now you can file for each Reporting Company entity.
Step 5: Identify each entity you have to file for if you have not already done that, and collect the information you need for each entity. You’ll need:
· A copy of the certificate filed to create the entity before you begin, the Tax Identification Number, and the physical address of the entity.
· Name of entity. This should be the exact legal name from the documentation forming the entity.
· Alternative names the entity might use or operate under.
· Tax identification number.
· Upload the certificate creating the entity where indicated.
Click the button as to type of report for Item 1.
For each you need to get the certificate forming the entity to upload and Tax identification number
Step 6: When you complete the filing, copy and paste the confirmation of filing including the BOIR number into the template you created above. In that way you have one document with all relevant CTA filing information.
Before leaving the page that confirms your filing was complete download and save in a CTA file folder on your computer the PDF of the filing confirmation be sure to add the name of the entity involved to the name you use to save it because the confirmation does not indicate anywhere which entity it is for (another example of the difficulty and lack of practicality of the FinCEN website and handling of the CTA). You should receive an email confirming the filing was complete. Save that as well and again be certain to add the reporting company name to the file name so it is clear which entity it is for.
Conclusion
It certainly seems that any entity or person required to file under the CTA should do so. Given the limited time before the general January 13, 2025 deadline and the complexity and detailed information required, you should act immediately. This certainly may not be the last word on the CTA, but the magnitude of penalties that could be involved suggests filing now, even if the CTA is eventually modified or repealed, may be the only option. Getting organized and approaching filing in a methodical way, can make it easier to file more efficiently. Hopefully, if the CTA is upheld and not repealed FinCEN can revisit the approach that they have taken and try to make the guidance more streamlined and understandable, and improve the website to facilitate filing. FinCEN should also address the practical difficulties many Reporting Companies will have obtaining BOI and other information.