Over three years ago, Congress enacted the federal Corporate Transparency Act ("CTA"), which for the first time obligates business owners, among others, to file beneficial ownership information ("BOI") reports with the U.S. Treasury's Financial Crimes Enforcement Network ("FinCEN"). The CTA is the culmination of a multi-year effort intended to thwart the use of the United States as a haven for money laundering, human trafficking, terrorism, and other crimes. FinCEN issued final regulations on the reporting requirements in September 2022, and those requirements kicked off officially on January 1, 2024. FinCEN estimated that over 30 million reporting companies existed before January 1, 2024. These companies have until January 1, 2025, to file their initial BOI reports—this deadline is less than four months away.

The number of BOI reports filed with FinCEN since January 1, 2024 has fallen dramatically short of FinCEN's projections. There are at least four possible explanations for this current shortfall. First, some reporting companies have postponed making their initial BOI reports pending the resolution of litigation challenging the constitutionality of the CTA. Second, some reporting companies have deferred making their initial BOI reports pending the possible enactment of federal legislation that would extend the initial BOI reporting deadline or repeal the CTA in its entirety. Third, some reporting companies have decided to file their initial BOI report as late as possible before the initial filing deadline of January 1, 2025, likely to minimize the need to file an updated BOI report if there is any change to an initial filing. Fourth, even with the number of articles from the press, law firms, accountants, and others, awareness of CTA requirements may not be as robust as FinCEN had expected. Whether FinCEN will be inundated with a deluge of BOI reports filed on the eve of the filing deadline remains to be seen. Those reporting companies that have not yet filed should consider doing so in the next month or two to avoid any potential filing logjam closer to the end of the year.

Judicial or Legislative Reprieve from Initial BOI Report Filing?

Reporting companies should not pin their hopes on litigation that seeks to declare the CTA unconstitutional and enjoin its enforcement on a nationwide basis. The pending federal court cases offer little realistic hope that the federal courts will issue an opinion overturning the CTA on constitutional grounds with nationwide application.

On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA was unconstitutional. The plaintiffs, National Small Business United (d/b/a National Small Business Association) ("NSBA") and Isaac Winkles, an NSBA member and small business owner, filed suit in November 2022. The complaint alleges that the CTA's mandatory beneficial ownership disclosure requirements exceed Congress's authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments. The court framed the question as whether the Constitution gives Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a state. In finding that the Constitution does not grant Congress such power, the trial court ruled in favor of the plaintiffs and declared the CTA unconstitutional. The trial court ruled that the CTA cannot be justified by any of Congress's enumerated powers and therefore exceeds the Constitution's limits on Congress's power. The court declined to decide whether the CTA violates the First, Fourth, and Fifth Amendments. Accordingly, the court granted the plaintiffs' summary judgment motion and permanently enjoined the defendants from enforcing the CTA, but limited the injunction only to the handful of plaintiffs who brought the case. Importantly, the CTA reporting requirements remain in effect for the tens of millions of others not involved with the case.

In response to the ruling, FinCEN stated that it will comply with the injunction not to enforce the CTA "for as long as it remains in effect[]," but FinCEN was crystal clear that non-enforcement applies only to the plaintiffs in that case, i.e., only Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the NSBA, and the roughly 65,000 members of the NSBA (as of March 1, 2024). Note that FinCEN included only NSBA members as of March 1, 2024, so an entity seeking to join the NSBA in hopes of shielding itself from CTA enforcement may not succeed. All other entities must still comply with the CTA and are required to submit beneficial ownership and company applicant information to FinCEN.

The federal government promptly appealed the decision to the federal Court of Appeals for the Eleventh Circuit. Oral arguments are scheduled for September 27, 2024. A decision in the case is not expected before January 1, 2025 (when reporting companies are required to submit their initial BOI reports). Even if the Eleventh Circuit does issue a ruling in 2024, it's all but certain that the losing party will appeal to the U.S. Supreme Court, which would mean that a final ruling is almost certain to be delivered after the end of the year. Business groups and others have filed at least six other lawsuits in federal district court challenging the constitutionality of the CTA, but these cases are unlikely to be finally resolved this year as well. As a result, reporting companies hoping for judicial relief in 2024 will be disappointed.

Reporting companies looking for legislative relief by the end of 2024 may be similarly disappointed. Putting aside the political theatrics of an election year, the legislation currently pending in Congress that would either extend the reporting deadline(s) or repeal the CTA has not gained much traction—yet. One potential glimmer of hope is that a deadline extension would find its way by means of a rider into the National Defense Authorization Act of 2025, legislation that must be enacted so as to fund the Defense Department. The latest legislative effort was a bill filed in the House of Representatives on August 2, 2024 (H.R. 9278) that would provide existing small businesses with an additional year to file their BOI reports. We will monitor these legislative efforts, but reporting companies should be prepared to file their initial BOI reports by year-end should the CTA-related legislation not be enacted by January 1, 2025.

What Should Reporting Companies Be Doing Now?

Reporting companies taking a realistic and sober view of the prospect of judicial or legislative relief in 2024 may conclude that they will need to mobilize and prepare to file their initial BOI reports by January 1, 2025. What should they do now?

• Reporting Companies. Reporting companies should determine whether they are, in fact, reporting companies. If so, they should then determine whether one or more of the 23 exemptions to the definition of reporting companies applies. To date, two of the more widely discussed exemptions are the large operating company exemption and the subsidiary exemption. A large operating company means any entity that: (i) employs more than 20 full-time employees in the United States; (ii) filed in the previous year federal income tax returns showing more than $5 million in gross receipts or sales from domestic income sources; and (iii) has an operating presence at a physical office in the United States. Nuances exist for reporting companies that are part of a multi-entity corporate structure, and thus, careful consideration of the structure is required. The subsidiary exemption focuses on subsidiaries, not parents or other affiliates, of exempt entities. To qualify for the subsidiary exemption, the entity's ownership interests must be controlled or wholly owned, directly or indirectly, by any of the enumerated 18 exempt entities. Note that "wholly" modifies "owned," but does not modify "controlled." The question thus arose as to whether a subsidiary whose ownership interests are partially controlled by an exempt entity qualifies for the subsidiary exemption. FinCEN answered this question in the negative in its January 12, 2024 FAQ update (Question L.6): "If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify. To qualify, a subsidiary's ownership interests must be fully, 100 percent owned or controlled by an exempt entity." (Emphasis original.) FinCEN explained that "control of ownership interests means that the exempt entity entirely controls all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary's ownership interests for the exemption to apply."
• Beneficial Owner. Assuming the reporting companies do not qualify for an exemption, they will need to report their beneficial owners (and, for reporting companies created or registered in 2024 and later, their company applicants, as explained below). A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the reporting company. Generally, an individual exercises substantial control over a reporting company if, among other requirements specified in the CTA, that individual is a senior executive officer, has authority to appoint or remove a senior officer or a majority of the board of directors, or is able to make or direct important decisions for the reporting company. That individual does not have to own or control any ownership interests of the reporting company. A reporting company thus needs to inventory who qualifies as a beneficial owner, by virtue of either exercising substantial control or by owning or controlling at least 25% of the ownership interests of the reporting company. For complex structures, gathering and organizing this information may be a time- consuming and—yes—challenging process. Because of the severe civil and criminal penalties for non-compliance with the CTA and its implementing regulations, and notwithstanding the willful violation standard, reporting companies may err on the side of being overly inclusive in identifying those who are beneficial owners by virtue of exercising "substantial control" over the reporting company. One obvious risk of overreporting is that changes in the identified beneficial owners will need to be timely updated with FinCEN as changes occur.
• What to Report.
  • Beneficial Owner. Once the reporting company has determined who qualifies as a beneficial owner, the reporting company will then need to obtain the information for each beneficial owner that needs to be reported to FinCEN. That may be relatively straightforward in most cases. This information consists of the individual's name, date of birth, residential address, and an identifying number from an acceptable identification document such as a passport or U.S. driver's license, and the name of the issuing state or jurisdiction of identification document. In some limited situations, it is possible that a beneficial owner may refuse to provide the necessary information. The reporting company will need to advise the recalcitrant beneficial owners of the severe criminal and civil penalties for refusing to provide the necessary information. Note that the onus is on the reporting company, which is not permitted to file an incomplete BOI report with FinCEN.
  • Reporting Company. The reporting company will also need to obtain and provide information about the reporting company itself and, if applicable, the company applicant(s). The reporting company will need to report its (a) legal name, (b) trade names, (c) current street address of its principal place of business if that address is in the United States (e.g., a U.S. reporting company's headquarters), or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States (e.g., a foreign reporting company's U.S. headquarters), (d) jurisdiction of formation or registration, and (e) Taxpayer Identification Number ("TIN") (or, if a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction). With respect to a company applicant, the reporting company will need to report the following: (i) the individual's name, (ii) date of birth, (iii) address, and (iv) an identifying number from an acceptable identification document such as a passport or U.S. driver's license, and the name of the issuing state or jurisdiction of the identification document.
  • Company Applicant. If the reporting company is created or registered in 2024 and later, the company applicants must be reported to FinCEN. If the company applicant works in corporate formation, then the reporting company must report the company applicant's business address. Otherwise, the reporting company must report the company applicant's residential address.
• Dissolved Entities. Note that a reporting company should not assume that if it is terminated in 2024, it will not have a BOI report filing obligation. FinCEN issued guidance in July 2024 making clear that a reporting company that formally and irrevocably dissolves in 2024 will still need to file a BOI report with FinCEN by the January 1, 2025 deadline.
• Vendors. On receipt of the necessary information for the beneficial owners (and, if applicable, company applicants), the reporting company will then populate the form prepared by FinCEN for each reporting company. Although a reporting company may itself populate the form and submit it once completed to FinCEN, a number of vendors stand ready to assist in this process for a fee. Some will actually submit the completed BOI report to FinCEN, which includes making the required certification that the information being submitted is true, accurate, and complete.

The process outlined above may appear daunting, especially for business enterprises having numerous reporting companies. But as we approach the fourth quarter of 2024, now is the time to gather the information necessary to populate the BOI report forms for each reporting company and submit the completed forms to FinCEN by the January 1, 2025 deadline. As suggested above, it may not be prudent to pin hopes on judicial or legislative relief by the filing deadline, especially in light of the severe criminal and civil penalties for a willful failure to comply with the CTA.