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Required Compliance with the Corporate Transparency Act is Near

October 17, 2024 General

We are slightly more than 2 months from the January 1, 2025 date of required compliance with the Corporate Transparency Act (“CTA”) for corporate entities created prior to January 1, 2024.  (If required to make disclosures under the CTA, Entities created in 2024 are required to make their disclosure within 90 days of formation.)  

At this time, there is no nationwide injunction that would preclude enforcement of its requirements.  An Alabama federal district court found the personal information reporting requirement of the Act unconstitutional and issued an injunction but that injunction is only applicable to the filing party and the decision is on appeal.  National Small Business United v. Yellen, — F.Supp.3d —- (N.D. Ala. 2024).  Oral argument before the appellate court was held on Friday, September 27.  There is a possibility, though it is unlikely, that an appellate decision will be issued before January 1, 2025.  However, there are reports that the tenor of the argument suggests, although hardly compels, the conclusion that the Eleventh Circuit will reverse the holding of the District Court.  In addition, an Oregon federal district court recently rejected new challenges to the constitutionality of the Corporate Transparency Act and refused to issue an injunction against its enforcement.  Firestone, et al. v. Janet Yellen, et al. Case No. 3:24-cv-1034-SI (D. Ore.). 

The CTA applies to any legal entity created by filing a document with a Secretary of State, subject to certain exemptions.  Here is a link to FAQs under the Act. https://www.fincen.gov/sites/default/files/shared/BOI-FAQs-QA-508C.pdf  Here is a link to the FinCen website explaining the process for reporting, if required. https://fincen.gov/boi

In general, the CTA applies to any legal entity created by a filing with a Secretary of State for domestic entities.  There are 23 exemptions.

Regarding inactive companies, the FAQs for the CTA provide in relevant part:

  • C.13. Is a company required to report its beneficial ownership information to FinCEN if the company ceased to exist before reporting requirements went into effect on January 1, 2024?

    A company is not required to report its beneficial ownership information to FinCEN if it ceased to exist as a legal entity before January 1, 2024, meaning that it entirely completed the process of formally and irrevocably dissolving. . . . A company that is administratively dissolved or suspended—because, for example, it failed to pay a filing fee or comply with certain jurisdictional requirements— generally does not cease to exist as a legal entity unless the dissolution or suspension becomes permanent.

Notwithstanding the foregoing, there is an exemption for “inactive companies” as follows:

   Inactive entity (Exemption #23) An entity qualifies for this exemption if all
   six of the following criteria apply:

  1. The entity was in existence on or before January 1, 2020.
  2. The entity is not engaged in active business.
  3. The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially. “Foreign person” means a person who is not a United States person. A United States person is defined in section 7701(a)(30) of the Internal Revenue Code of 1986 as a citizen or resident of the United States, domestic partnership and corporation, and other estates and trusts.
  4. The entity has not experienced any change in ownership in the preceding twelve-month period.
  5. The entity has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelvemonth period.
  6. The entity does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

If reporting is required, the disclosure is required for a “beneficial owner.” 

   D.1. Who is a beneficial owner of a reporting company?

  • A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control (see Question D.2) over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests (see Question D.4). Because beneficial owners must be individuals (i.e., natural persons), trusts, corporations, or other legal entities are not considered to be beneficial owners. However, in specific circumstances, information about an entity may be reported in lieu of information about a beneficial owner (see Question D.12).

    How many beneficial owners can a reporting company have?

    An individual might be a beneficial owner through substantial control, ownership interests, or both. A reporting company can have multiple beneficial owners; there is no maximum number of beneficial owners who must be reported. [Issued October 3, 2024] ii. What if a reporting company does not have any individuals who own or control at least 25 percent? FinCEN expects that every reporting company will be substantially controlled by one or more individuals, and therefore that every reporting company will be able to identify and report at least one beneficial owner to FinCEN.

    D.2. What is substantial control?

    An individual can exercise substantial control over a reporting company in four different ways. If the individual falls into any of the categories below, the individual is exercising substantial control: • The individual is a senior officer (the company’s president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function). • The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company. • The individual is an important decision-maker for the reporting company. See Question D.3 for more information. • The individual has any other form of substantial control over the reporting company as explained further in FinCEN’s Small Entity Compliance Guide (see Chapter 2.1, “What is substantial control?”).

Simon, Peragine is ready to help with all of your CTA needs, including assessing whether you are subject to the CTA or qualify for an exemption, as well as identifying your beneficial owners and preparing a report.  Contact Robert Redfearn if you have any questions. 

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