By John M. Goralka
Sacramento, CA
On January 1, 2024, the Corporate Transparency Act (CTA) became effective. Every new corporation, limited liability company (LLC), limited partnership and any entity whose existence is created by a filing with a Secretary of State in any state must file with the Financial Crimes Enforcement Network (FinCEN). More than 32 million entities are estimated to be affected and required to file.
This filing will require the business name, current address, state of information and tax identification number for the entity. The filing will also require the name, birth date, address and a copy of a government-issued photo ID, such as a driver’s license or passport, of every direct and indirect owner. Each of the 32 million or more entities will almost certainly involve a filing by more than one person.
The inclusion of this information for indirect owners creates both complexity and a very broad range of who qualifies as an indirect owner requiring filing of individual otherwise personal information. Penalties for failure to comply are high. (Read more about the CTA in my article Are You Ready for the Corporate Transparency Act?)
On March 1, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional. The CTA is already deceptively complicated as it applies to both direct ownership and to “beneficial ownership.” The plaintiffs in the Alabama case are members of the National Small Business Association (NSBA). The ruling would appear directly applicable to the members of the NSBA to delay or excuse their filing requirements depending upon the government’s reply. This decision may appear to indirectly lessen the requirement for compliance in the short term to us all. Only time will tell if the federal government will appeal, or if the CTA is revised.
Here are some of the concerns about the CTA:
Private information is required to be filed. One of the issues about the CTA is the requirement to file or provide personal information, such as a copy of a driver’s license or passport, home address and Social Security number. This is always a concern because of the proliferation of identity theft. We are all worried about keeping our personal, private information safe, particularly of this type.
Short deadline. Changes to beneficiaries must be reported within a very short timeframe. For example, if a minor turns 18 and is an owner or inheritor of shares of a company, then this change must be reported within 30 days. The minor turning 18 may not even have knowledge of this inheritance within 30 days. That report is to include personal data such as Social Security number and driver’s license. Name changes from marriages and even moving to a new home would trigger similar updates.
Compliance requirements. Compliance with the CTA can impose a significant burden on small businesses. Small businesses are actually the target for the CTA, and large and public businesses are exempt. This is the opposite for securities filings that impose more complex rules for large and publicly traded companies with exemptions for small businesses.
Heavy penalties for failure to comply. Penalties are severe for failure to comply. The CTA divides penalties into three categories: unknowing violation, willful failures and violations in pursuit or as part of another federally illegal act. Penalties include a $500 daily civil penalty, fines of up to $10,000 and a possible two-year prison sentence for those that do not provide or update beneficial ownership information with FinCEN. Knowingly failing to comply may trigger a $500 per day civil penalty, $250,000 in fines and a five-year federal prison sentence.
These issues are in addition to the constitutional issues addressed by the court, such as whether there was the power to issue the CTA. Part of that argument is whether the federal Congress can regulate intrastate commerce or only interstate commerce.
That said, the ruling appears by its terms to affect only CTA compliance and filing requirements for members of the NSBA. The CTA has a much broader reach than that. Note that law firms and other professionals that form business entities may have an obligation to file under the CTA. The CTA itself requires study and examination to understand the compliance requirements. Moreover, the severe penalties for failure to comply warrant careful consideration.
With all of that in mind, consider using your best efforts to continue to comply with the CTA requirements unless, or until, more definitive guidance becomes available.
