Keeping it Clean, and Above All… Transparent

Considerations To Be Aware of Relating To The Corporate Transparency Act

(Effective Date of original Posting: 03/15/2023; Effective Date of Most Recent Update: 1/3/2025)

Attention business owners: Are you aware of the reporting requirements imposed by the Corporate Transparency Act (CTA) – and the current status of those filing obligations?

This blog summarizes the CTA reporting requirements and exemptions plus what’s currently necessary to comply with them. Because most small businesses won’t qualify for an exemption, I strongly encourage you to review this summary and familiarize yourself with CTA reporting requirements – noting the status of the reinstated Texas District Court injunction which temporarily suspends the need to file under the CTA.

*** Update: On Dec. 3, 2024, the US District Court for the Eastern District of Texas issued a nationwide preliminary injunction suspending the CTA and the requirement of businesses to report thereunder. Note that this injunction and suspension of the reporting requirement was temporary and was subject to appeal.

The government then appealed the Texas District Court ruling to the U.S. Court of Appeals for the Fifth Circuit for an emergency stay of the injunction – which was granted on December 23, 2024. This emergency stay of the Texas District Court injunction effectively reinstated CTA filing requirements. However, recognizing the related confusion for filers, the date on which filings had to be submitted was extended to Jan. 13, 2025 in most cases.

Three days later (12-26-24), the Fifth Circuit Court of Appeals reversed its position and vacated its earlier stay of the District Court injunction, effectively re-instating the injunction and again temporarily suspending the requirement to file.

In response, the Department of Justice has filed an emergency application with the Supreme Court requesting a stay of the District Court injunction – which, if granted, would re-impose the requirement to file under the CTA. This application to the Supreme Court has not been heard or decided as of the date of this posting – so as of today the injunction remains in effect and there is no requirement to file.

As you might gather, whether or not a CTA filing is required is both confusing and fluid. We will update this blog posting periodically as updated information provides additional clarity as to CTA reporting compliance.

Background

On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act (NDAA). The CTA requires that certain business entities must disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Department of the Treasury. On September 30, 2022, FinCEN issued regulations (referred to as the “Final Rules”) on how the CTA will be implemented.

Here is a summary of the Corporate Transparency Act, including its purpose, scope and impact on Wisconsin business entities.

Purpose of the Corporate Transparency Act

The purpose of the Corporate Transparency Act is to prevent the use of anonymous business entities for illegal activities such as money laundering, terrorism financing and tax evasion. Anonymous business entities are those that don’t disclose their ownership information, making it difficult for law enforcement agencies to investigate and prosecute illegal activities.

The use of anonymous business entities has been a significant problem in the U.S. A 2016 report by Global Financial Integrity found that the U.S. was one of the top destinations for anonymous shell companies, with more than 10,000 shell companies created every year for a variety of illegal activities.

The Corporate Transparency Act aims to address this problem by requiring non-exempt business entities (“Reporting Companies”) to disclose their beneficial ownership information. This includes the names, addresses, dates of birth and identification numbers of all individuals who own or control at least 25% of a Reporting Company, as well as any individuals who create or register the entity or who exercise substantial control over a reporting company.

Intended Benefits and Concerns of the Corporate Transparency Act

1. The intended benefits of the Corporate Transparency Act include:

• Improved transparency: The CTA is intended to improve transparency in the business world by requiring business entities to disclose their beneficial ownership information. This will make it easier for law enforcement agencies to investigate and prosecute illegal activities.
  
• Deterrence: The CTA will deter individuals from using anonymous business entities for illegal activities, because of the increased risk of being caught and prosecuted.
  
• Protecting the U.S. financial system: The CTA will help to maintain the integrity of the U.S. financial system and will protect it from being used for illegal activities such as money laundering, terrorism financing and tax evasion.

2. However, there are also concerns about the Corporate Transparency Act:

• Cost of compliance: One of the primary concerns is that the law may create additional administrative burdens for businesses that are required to report. Reporting beneficial ownership information to FinCEN may be time-consuming and costly, especially for smaller business entities.
  
• Privacy concerns: The law requires business entities to disclose their beneficial ownership information to FinCEN, which raises concerns about its privacy. Some business entities may be reluctant to disclose their ownership information, especially if they have concerns about how this information will be used or shared.
  
  There are also concerns about the security of the information that is reported to FinCEN. Because of its sensitive nature, there is a risk that it could be vulnerable to data breaches or other forms of cybercrime. This could put reporting companies at risk and damage their reputation if their beneficial ownership information is compromised.
  
• Effectiveness: Another concern is simply that the law may not be effective in preventing illegal activities. Some argue that criminals may simply find ways to evade the law or continue to use anonymous business entities in other jurisdictions that don’t have similar disclosure requirements.

Scope of the Corporate Transparency Act

The Corporate Transparency Act applies to a business entity of any form (whether established as a corporation, limited liability company, limited partnership or other type of entity, domestic or foreign) organized or registered to do business with any Secretary of State (or similar state agency, such as Wisconsin’s Department of Financial Institutions), and which is not specifically exempted from reporting. These non-exempted business entities that are subject to the CTA reporting requirements are referred to as “Reporting Companies.”

Not all business entities are subject to the CTA reporting requirements. Specifically, the CTA identifies 23 exemptions for entities that are not required to file a report. FinCEN is also empowered to create new exemptions as needed. Specific criteria for the exemptions are included in the CTA regulations issued by FinCEN. Exempted entities include but are not limited to entities that are:

• Regarded as large operating companies, defined as having 20 or more full-time U.S. employees, more than $5 million in gross receipts or sales derived from U.S. operations, as reported in a federal income tax return and an operating presence at a physical office within the U.S. which is physically distinct from the place of business of any other unaffiliated entity;
  
• Publicly traded on a U.S. exchange;
  
• Classified as tax-exempt;
  
• Accounting firms;
  
• Banks, bank holding companies, savings and loans and many financial service providers;
  
• Public utilities;
  
• Certain pooled investment vehicles;
  
• Insurance companies or state-licensed insurance producers.

For those business entities qualifying for a CTA reporting exemption, there are no reporting obligations and nothing needs to be done. However, given the wording of the exemptions, nearly every U.S. family business will be subject to the CTA reporting requirements. According to initial studies, FinCEN estimates that over 32 million entities will be considered Reporting Companies and will be subject to beneficial owner filing requirements.

Compliance and Reporting

Assuming that the CTA is in effect (is not suspended as the result of an injunction or other rule making) and further assuming that an exemption does not apply and a business entity is characterized as a CTA Reporting Company, data must be reported to FinCEN about certain designated individuals and the entity itself.

1. Parties whose information must be reported: For entities that must report, information must be provided related to the Reporting Company itself, and for persons designated as either a “Beneficial Owner” or “Company Applicant.”

(a) A Beneficial Owner is an individual who directly or indirectly owns or controls at least 25% of a Reporting Company or persons who directly or indirectly exercise substantial control over it. The Final Rule provides guidance as to what constitutes “substantial control” and reporting in the case of joint ownership, and ownership or control by trusts, entities which are themselves exempt or by minors (as well as other circumstances which may be unclear concerning the specifics of reporting);

(b) A Company Applicant is the individual who files the document with the Secretary of State that creates the Reporting Company, and an individual who is primarily responsible for directing or controlling the filing. Company Applicant information only needs to be submitted for Reporting Companies formed on or after the Effective Date. (1/1/24 – see below)

2. Effective Date. The Final Rule provides that CTA reporting rules take effect on January 1, 2024. As a result, no reporting requirements are currently imposed for calendar year 2023 but should be planned for commencing January 1, 2024 and thereafter. After the initial CTA reporting, updated or corrected information must be filed within 30 days of the modification or update.

3. Timing of Reporting

Deadlines for filing initial CTA entity and ownership information are based on the date on which the entity filed its initial documents of organization with the state of its organization. Changes to a submitted report and additional timing considerations are summarized as:

(a) For a Reporting Company formed before January 1, 2024. The CTA originally provided for the initial filings for entities formed before 1/1/2024 to be completed on or before 1/1/2025, with subsequent filings to be submitted periodically thereafter;

(b) For a Reporting Company formed during calendar year 2024, the CTA provided for initial filings to be submitted 90 days after the entity was formed, with subsequent filings to be submitted periodically thereafter;

(c) For a Reporting Company formed on or after January 1, 2025, initial reporting was to be due 30 days after the entity is formed, and periodically thereafter;

(d) Changes to a submitted report (including change of address of a Beneficial Owner or change of ownership as the result of the death of an owner) are due 30 days after the change occurred, or concerning an inaccuracy, 30 days after the Reporting Company becomes aware of (or has reason to know of) the inaccuracy;

(e) The above deadlines have been extended in certain circumstances effective for businesses located in geographic areas impacted by specified hurricanes/natural disasters.

***** IT IS IMPORTANT TO NOTE THAT IF CTA REPORTING IS EVENTUALLY DETERMINED TO BE REQUIRED, THE FILING DEADLINE DATES SUMMARIZED ABOVE WILL LIKELY BE MODIFIED.

4. Information Which Must Be Reported

(a) For the Reporting Company itself, the entity’s full legal name and any d/b/a name must be reported, as well as the entity’s current street address, state of formation and taxpayer/employer identification number;

(b) For persons designated as Beneficial Owners or Company Applicants, the person’s full legal name, date of birth, residence address (or business address of the Company Applicant, if formation is applied for as part of that person’s business), a unique identifier issued by a state or federal government (such as a driver’s license or passport) and an image of the identification document itself (so, for example, a picture of the relevant driver’s license or passport). Note that Company Applicant information does not need to be reported for entities formed before the Effective Date.

5. Who Is Responsible For Filing The Report? The Reporting Company itself is responsible for CTA reporting and filings.

6. Access to, and Security of, Information Reported Under the CTA. Federal law requires FinCEN to implement protocols to safeguard collected beneficial ownership information, to build a secure IT system to store the collected information and to establish processes and procedures to ensure only authorized use. The CTA authorizes FinCEN to disclose beneficial ownership information only to state and federal law enforcement agencies, and to financial institutions to conduct legally required customer due diligence, provided the financial institutions have received customer consent to such a disclosure.

7. Penalties. Failure to comply with the law can result in significant penalties. Criminal penalties include fines of up to $10,000 and imprisonment for up to two years. Civil penalties of up to $591 per day (as of December 2024) may also be imposed.

Notwithstanding the Texas District Court preliminary injunction currently in effect which suspends CTA filing requirements, until CTA filing obligations are determined inapplicable, compliance should be considered and planned for. We recommend that you plan to make CTA reporting a smooth “non-event” for those entities which must report:

1. Determine whether or not your entity falls into one of the CTA exceptions. If exemption qualification is confirmed, CTA reporting is not required and you don’t need to do anything more (unless the exemption status of your business changes).
   
2. If CTA reporting is required, identify company Beneficial Owners and Company Applicant(s) and collect the necessary information to eventually report to FinCEN. This may involve conducting interviews with key personnel to determine who owns or controls the entity. Incorporate a method for updating CTA-required information on an ongoing basis.
   
3. Because the entity is responsible for CTA reporting, you should develop internal policies and procedures for compliance and appoint an officer, manager or external party to prepare and file the required reports and oversee the process;

Compliance with the CTA reporting requirements may initially require quite a bit of effort and planning to compile all of the information that must be reported (including pictures of Beneficial Owner government identifying documents – such as driver’s licenses and/or passports).

Recommended Action: As a result of the Texas District Court injunction, CTA filing requirements have been suspended. However, this suspension is only temporary and a filing requirement may be re-imposed. Accordingly, for those that have not yet filed under the CTA, we recommend that Reporting Companies gather the information necessary to complete the filing and either (i) proceed with filing now even though not required; or (ii) keep abreast of this matter and prepare to file by the applicable deadline date (if a filing is later required).

This blog posting will be updated as CTA filing requirements continue to transition.

Additional questions relating to the Corporate Transparency Act (CTA) or other business planning issues?

Effective Date of Original Post: March 15, 2023. Effective Date of Most Recent Update to this Post: January 3, 2025. This post was derived from sources that we believe to be accurate as of the Effective Date(s) of the most recent update to this post. Notwithstanding that, we do not guarantee the accuracy of the information provided. Further, circumstances after the Effective Date(s) may change and such changed circumstances are obviously not considered in this posting. No action should be taken based on the information provided in this post without first discussing this topic with your appropriate advisors. Not for commercial reprint.