Further Clarity on the Corporate Transparency Act

The Corporate Transparency Act: An Introduction

In an effort to fight money laundering, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) mandated that certain businesses submit detailed ownership and control information to a national database. After multiple failed attempts to pass similar laws, the Corporate Transparency Act (the “Act”) officially became law on January 1, 2021. The Act strengthens the United States’ commitment to combating money laundering by establishing a national database that catalogs US companies, their individual owners, and those with significant control over these entities.

Before the Act, the United States was falling behind compared to other nations’ anti-money laundering efforts. While legal entities in the United States typically filed documents with a state agency, they failed to identify who benefited financially from companies, or those who directly or indirectly controlled them. Federal laws generally require companies to report this information when opening US bank accounts, but bad actors have circumvented these requirements by using shell companies to acquire tangible assets or real estate—sidestepping bank accounts altogether.

FinCEN projects that over 32 million existing companies—and around five million new companies annually—could ultimately be impacted by the Act.¹

Change to the Deadline and a Pause

But the road to implementation hasn’t been smooth. The Act, while crucial for financial transparency, requires the collection of sensitive data, including home addresses and scans of government-issued IDs for company owners. Noncompliance carries severe consequences, such as hefty fines and possible jail time.

On Tuesday, December 3, a federal court in the Eastern District of Texas granted a nationwide preliminary injunction stopping enforcement of the Act. The Department of Justice appealed that decision and on December 23, 2024, the Court of Appeals for the Fifth Circuit lifted the national injunction. FinCEN subsequently updated the filing deadline to January 13, 2025, for entities created prior to January 1, 2024, giving reporting companies a brief extension. On December 27, 2024, the Court of Appeals for the Fifth Circuit reinstated the nationwide preliminary injunction.  Currently, the Act is not enforceable, but this could change without prior notice, and compliance deadlines are approaching fast.

While litigation over the Act will continue, with several cases still pending in other courts, the Fifth Circuit’s order noted that the government had made a strong case in support of the Act’s constitutionality. Different federal courts might have different opinions on whether the Act is constitutional, making it likely that the United States Supreme Court will have to step in and make a final decision. Even if the Act is ultimately found to be unconstitutional on a federal level, various states (including California, New York, and Maryland) have passed their own versions of the Act, each of which contains its own burdensome reporting requirements.

At this time, businesses should prepare to comply with federal reporting requirements given that the current injunction may be lifted with little warning.  Reporting requirements are described below:

What are the filing deadlines?

They vary, depending on when the company was formed:

• Those formed before January 1, 2024, have until January 13, 2025, to report the required information;
• Those formed between September 4, 2024, and September 24, 2024, also have until January 13, 2025;
• Those formed between September 25, 2024, and December 2, 2024, have 90 days;
• Those formed between December 3, 2024, and December 23, 2024, have an additional 21 days to report, meaning they must register within 111 days of creation; and
• After January 1, 2025, companies have only 30 days from the date of formation, or the date of a change in reporting information (such as a change in who owns or controls the company, or their addresses, and relevant government identification).

Who is required to report?

The Act requires “Reporting Companies” to file “Beneficial Ownership Information” reports (“BOI reports”) unless the company meets an exception. A Reporting Company is defined as any entity—such as a limited liability company, corporation, limited partnership, or similar entities—created by filing paperwork with a Secretary of State (or tribal jurisdiction). Exceptions include:

1. charities,
2. large companies with 20 or more full-time employees, $5 million or more in gross receipts, and a physical operating office in the US, and
3. legal entities which are already subject to significant regulatory reporting requirements, such as banks.

BOI reports contain information about the company itself, any individual deemed a “Beneficial Owner,” and certain individuals involved in forming the company and registering it with the relevant Secretary of State. More specifically, a “Beneficial Owner” is a person who, directly or indirectly:

1. exercises “substantial control” over a Reporting Company; or
2. owns or controls 25% or more of the ownership interest in a Reporting Company.

What constitutes “substantial control”? It’s not entirely clear. Senior officers, including president, CEO, CFO, COO, and general counsel are all deemed to exert “substantial control.”² So are individuals with the authority to appoint or remove any of these senior officers or a majority of the board of directors.³ A person who directs, determines, or has “substantial influence” over “important decisions” is also considered to have substantial control, along with any individual who has any other form of substantial control.⁴ While the Act features a list of non-exclusive “important decisions,” this part of the definition is arguably the most ambiguous. Plus, trusts can complicate matters even further, leaving small business owners with even more questions.

What information must you provide?

For each Reporting Company, BOI reports submitted to FinCEN must include the legal name (including any trade names), a street address for the principal place of business (which cannot be a P.O. box or the company’s lawyer’s address), the state of formation, a tax identification number, and a scan of an identifying document from the issuing jurisdiction, such as a certificate of formation.

With regard to Beneficial Owners and Company Applicants, BOI reports must include the person’s full legal name, date of birth, home address (which cannot be a P.O. box or the individual’s lawyer’s address), an official identifying number from a non-expired US passport, driver’s license, or state identification card, and a photocopy of said document. Notably, Company Applicants—the individuals involved in forming the company and registering it with the relevant Secretary of State—may be able to use their employer’s business address in lieu of their personal address.

Who can access the reported information?

FinCEN will maintain a secure national database, referred to as the “Beneficial Ownership Secure System” (“BOSS”), containing all BOI reports. Only certain law enforcement agencies, tax authorities, and a small number of others may access information on the BOSS, and only for specified purposes upon request.

What are the penalties for failing to comply?

When enforceable, noncompliance can have hefty consequences. Civil penalties can reach up to $500 per day,⁵ while criminal penalties may include up to two years in prison and fines as high as $10,000. Senior officers of non-compliant entities, along with anyone who willfully fails to provide or update a BOI report, can be held accountable.

Strategies to Ease the Burden

Obtain a FinCEN Identifier

FinCEN offers a streamlined reporting option that can save you time and hassle. By obtaining a unique identification number, individuals can simply share this number with relevant Reporting Companies. To get your FinCEN identifier, you’ll need to apply online and submit the required details, such as your name, date of birth, address, a unique ID number from an official document, and a copy of that document.

How does this save time? With a FinCEN ID, each person can update their own information directly. Imagine a company with 20 Beneficial Owners—every time one of them moves, changes their name, or gets a new driver’s license, the Reporting Company would need to update its BOI report within 30 days. How often does a senior officer even know that an employee got a new driver’s license? By allowing individuals to update their own FinCEN ID, they can make a single change to their profile, which automatically updates their information for every Reporting Company they are associated with. This shifts the responsibility to the individual, making the process more efficient for everyone involved.

Revisit Your Estate Planning

Generally, trusts aren’t considered Reporting Companies unless they’re established under a specific state statute requiring filing with the Secretary of State. However, high-net-worth families often create trusts that hold interests in family limited liability companies or family limited partnerships. In such cases, the trust becomes a Beneficial Owner. So, who needs to report their information when it comes to a trust? If there’s a sole trustee or a sole beneficiary entitled to income and principal, they must report. But modern trusts often spread control among various individuals. Trust protectors, investment trustees, distribution trustees, and anyone with the authority to dispose of trust assets must also report their information. Interestingly, some people in these roles might not even realize they have power over a given trust.

Given these factors, the number of Beneficial Owners for a small family limited liability company or family limited partnership can be surprisingly large. This makes it an ideal time to revisit your estate planning. Consider combining trusts where possible, decanting trusts to remove fiduciaries or beneficiaries who prefer not to report their information, converting privacy LLCs into privacy trusts, and converting asset protection entities into asset protection trusts. As always, consult with your advisory team before making these changes.

When in Doubt, Overreport

Given the severe consequences, including hefty fines and potential jail time, anyone uncertain about their status as a Beneficial Owner might consider reporting just to be safe. There’s no penalty for providing more information than necessary, after all.

Detangling the Act’s reporting requirements is a tricky proposition. Your Bernstein Advisor can connect you with the right experts to help you stay compliant while minimizing administrative burdens.