By H. Len Musgrove, Jr. 2024. All rights reserved.

Small business owners in Texas and other jurisdictions need pay immediate attention to the onset of an entirely new regulatory system of laws and regulations enacted by the Federal Government that became effective as of January 1, 2024:  The Corporate Transparency Act, or the “CTA”.  The CTA at its most basic imposes a new level of disclosure required by the Federal Government that in many ways overrides numerous protections of corporate, partnership and LLC laws of the Texas Business Organizations Code (“TBOC”), in addition to the similar laws of other states such as Delaware and Nevada.  For example, when a corporation or a manager-managed LLC is formed under the TBOC, the owners of the corporation, the owners of the LLC (manager managed) and the limited partners of the LP are not required by Texas law to be disclosed, which historically has provided some level of anonymity and confidentiality to such investors/owners.  Other jurisdictions such as Delaware and Nevada allow even more protection for the directors and managers of corporations and LLCs for example, as such parties need not be disclosed on their formation documents in these jurisdictions.  Businesses with less than 20 employees and up to $5 Million in annual revenues are now subject to the CTA.

Background of CTA How did the CTA become law in the USA?  There are a number of factors that evidently contributed to this significant change of policy, which  was quietly enacted as part of the Anti-Money Laundering Act of 2020.  Among such factors, according to the drafters of the new law, are the beliefs that the CTA “will help protect U.S. national security, provide critical information to law enforcement, and promote financial transparency.”  More specifically, there was a growing sense that in the formation of approximately 2 million new corporate and LLC entities annually there is a factor of bad actors among the owners of such entities which are formed to conceal illegal activities such as money laundering, financing of terrorism, serious tax fraud, human and illegal drug trafficking, counterfeiting, piracy and securities fraud. Additionally, other US-allied countries such as the UK and even the EU had previously enacted or agreed to enact similar laws and government registries to the CTA, so there was a sense that the USA didn’t want to fall behind in the fight against such illicit activities.  As well-meaning as this intent may sound, my sense as a career corporate and tax attorney is that such alleged concerns are likely overblown for the overwhelming majority of our clients, which will now bear the burden of compliance with the CTA, but could theoretically exist in some limited circumstances.  However, since I was not consulted about the enactment of CTA, the reality is that despite reasonable misgivings about the implications of the CTA our clients have little option but to become educated about the new law and comply with its requirements.  

Key Definitions under CTA.  Under the CTA and its regulations, certain eligible small businesses are required to provide information related to their “beneficial owners” — the individuals who ultimately own or control the company — through a “Beneficial Ownership Information Report” (“BOIR”) to the Financial Crimes Enforcement Network (“FinCEN”), an arm of the US Department of the Treasury. Failure to do so may result in civil or criminal penalties of up to $10,000 or two years in jail, or both.  A business characterized under CTA as a “Reporting Company” has a period of 30 days to one year to comply with the terms of CTA.  The CTA rules generally apply to both domestic and foreign privately held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company, limited partnership or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that is properly registered to do business in a U.S. state. 

Not every small business entity is a “Reporting Company” under the terms of the CTA or its regulations.  The list of entities that are exempt from the reporting rules is actually fairly lengthy, and includes government entities, non-profit entities, insurance companies and so-called “large operating companies.” The exemption created for a “large operating company” is limited to an entity that employs more than 20 employees on a full-time basis, has more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and physically operates in the United States. However, many of these companies already must meet other reporting requirements providing comparable information.

Beneficial Ownership Information Report Required to be filed with FinCEN.  For any Reporting Company, detailed information must be provided to FinCEN about: 

  1. The Reporting Company; 
  2. Beneficial owners (and their current spouses and changes of marital status) of the Reporting Company; and
  3. “Applicants” who registered the Reporting Company, which definition would include attorneys and accountants who assisted in the formation of the Reporting Company.  

Reporting Company Information. Any Reporting Company, beneficial owner, or applicant can apply directly to FinCEN for a unique identifier (“FinCEN ID”) that they can provide to FinCEN for use in future reports.  With respect to the Reporting Company, the following info must be included:

1. The full legal name of the Reporting Company; 

2. Any and all trade names or “doing business as” names; 

3. The business street address of the Reporting Company; 

4. The State or Tribal jurisdiction of formation, or for a foreign reporting company, State, or Tribal jurisdiction where such company first registers; and

5. The IRS Taxpayer Identification Number (“TIN”) (including an EIN of the Reporting Company), or, for foreign Reporting Companies without a TIN, a foreign tax identification number (along with the name of the relevant jurisdiction)).

Those who prefer to file directly as opposed to utilizing the services of a professional advisor to assist with the filing of the BOIR may utilize the following FinCEN link:  https://www.fincen.gov/boi . For other Reporting Companies, professionals such as corporate attorneys and CPAs are the better option.  

Beneficial Owner Information.  The beneficial owner of a Reporting Company must disclose the following information to FinCEN for “each individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise” either exercises “substantial control” over an entity or owns or controls no less than 25 percent of the “ownership interests” of the entity.  FinCEN requires each Reporting Company to provide information on at least one beneficial owner under the “substantial control” criteria, even if all other individuals qualify for an exclusion or fail to satisfy the “ownership interests” component.   If the beneficial owner is an exempt entity (or an individual who holds ownership interests in a Reporting Company exclusively through one or more exempt entities), then the Reporting Company must only report the exempt entity’s name.  The specific requirements of FinCEN for a beneficial owner are:

  1. Full legal name; 
  2. Current residential address;
  3. Date of birth; and 
  4. Unique identification number (from an unexpired passport, driver’s license, other state-issued identification, or FinCEN identifier) − Image of the ID (if not using a FinCEN identifier).

If you have the desire, you may preview the BOIR and its online version on this link:  https://boiefiling.fincen.gov/boir/html .  Our friends at FinCEN estimate approximately 3 hours are needed to file all the components of the BOIR if you are so inclined to do it yourself. 

Does the CTA Impact My Entity?  Every new Reporting Company formed after January 1, 2024 is required to file the BOIR within 90 days of its formation by the CTA.  Moreover, Reporting Businesses in existence before January 1, 2024 are required to file their own BOIRs by December 31, 2024.  Simply stated, ignore the new requirements of the CTA at one’s own peril, which as noted above may include fines and even jail time.  

As a professional, one of my biggest concerns over the compliance with the CTA (or inadvertent noncompliance) is that the federal government has indicated that that it will not directly send information about the CTA to business owners, regardless if they may be impacted.

Is There Any Relief from the CTA on the Horizon?  Although it is not advisable to rely on it just yet, on March 1 a U.S. District Court in Alabama ruled that the CTA is unconstitutional and issued an injunction as to its enforcement, potentially muddying the waters of long-term enforceability.  U.S. District Judge Liles C. Burke stated in his opinion: “The Government says that the CTA is within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations.  The Government’s arguments are not supported by precedent. Because the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress policy goals.” The US is expected to appeal the ruling and injunction, however, the Treasury Department has indicated through a spokesman that the Department is complying with the injunction which prevents enforcement.  It is notable that Judge Burke’s ruling was the product of a legal challenge brought by the National Small Business Association (“NSBA”) and one of its members against the Secretary of the U.S. Treasury Department.

If you or your Reporting Company need assistance in complying with the CTA and its BOIR, please feel free to contact the author or my partner C. Bruce Willis at [email protected] or [email protected] .