The Clock Is Ticking on the Corporate Transparency Act's Year-End Deadline

Have you or your professional advisers evaluated whether any entities you own, manage, or control are subject to the beneficial ownership reporting requirements of the Corporate Transparency Act (CTA)? If you've done so and determined that your entities are subject to CTA filing requirements, have they filed their beneficial ownership information (BOI) reports with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN)?

For anyone who answered no to either question, the time to act is now. Less than four months remain until the end-of-year CTA reporting deadline for most entities, and failing to comply can lead to harsh penalties.

CTA Refresher

In a prior article, we outlined "Essentials of the Corporate Transparency Act." The CTA took effect on January 1, 2024, requiring domestic and foreign "reporting companies" to file BOI reports with FinCEN. Domestic reporting companies include corporations, limited liability companies, limited partnerships, and any other entities created by filing a document with the Secretary of State or similar office under the law of a U.S. state or tribal jurisdiction—unless they qualify for one of the 23 exemptions under the CTA.

Foreign reporting companies include entities formed under foreign (non-U.S.) laws that are registered to do business in any U.S. state, territory, possession, or tribal jurisdiction by filing a document with a state secretary of state or similar office—unless they qualify for an exemption.

Exemptions generally apply to large, heavily regulated companies such as banks, credit unions, insurance companies, certain tax-exempt entities, and issuers of public securities registered under the Securities Exchange Act of 1934.

Most notably, there are exemptions for:

• Large Operating Companies: Companies employing more than 20 full-time employees in the U.S., maintaining an operating presence in the U.S., and having filed a federal income tax return for the previous year showing more than $5 million in gross receipts or sales, excluding those from outside the U.S.
• Entities Wholly Owned or Controlled by Exempt Entities: Subject to certain exceptions, entities whose ownership interests are wholly owned or controlled by one or more exempt entities.

Reporting Deadlines

Reporting companies are required to file their BOI reports within specific timeframes:

• Formed or Registered Before January 1, 2024: Must file initial BOI reports by January 1, 2025.
• Formed or Registered During Calendar Year 2024: Have 90 days after formation or registration to file initial BOI reports.
• Formed or Registered On or After January 1, 2025: Have 30 days after formation or registration to file initial BOI reports.

While there are no mandatory annual or periodic filings after the initial BOI report, any changes to previously reported information require the filing of an updated report within 30 days of the change.

Information to Be Reported

All reporting companies must report information about the company and each of its "beneficial owners." Generally, beneficial owners are individuals who own or control at least 25% of the ownership interests of the company or exercise "substantial control" over it.

An individual exercises substantial control if they:

• Serve as a senior officer (including president, CEO, CFO, COO, general counsel, or any officer performing similar functions).
• Have authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body).
• Direct, determine, or have substantial influence over important decisions.
• Have any other form of substantial control over the company.

Companies formed on or after January 1, 2024 must also report information about each of its "company applicants." There can be up to two company applicants:

1. The person who directly files the formation or registration documents.
2. The person primarily responsible for directing or controlling the filing of those documents.

Entities formed before January 1, 2024, are not required to submit company applicant information.

Required Information Includes:

• For the Reporting Company:

  • Full legal name and any trade or "doing business as" names.
  • Principal place of business in the U.S.
  • Jurisdiction of formation (or, for foreign reporting companies, jurisdiction of U.S. registration).
  • Tax identification number (or equivalent foreign tax identification number for foreign reporting companies).

• For Each Beneficial Owner and Company Applicant:

  • Date of birth.
  • Residential street address.
  • Identification number and issuing jurisdiction from a non-expired U.S. passport, U.S. driver’s license, U.S. government-issued ID, or foreign passport (if none of the former are available).
  • An image of the identification document.

Penalties for Non-Compliance:

Failure to comply with the CTA's reporting requirements can result in both civil and criminal penalties, including fines up to $10,000 and imprisonment for up to two years.

CTA Updates and Legal Challenges

Since the CTA's enactment and the publication of FinCEN's Small Entity Compliance Guide, FinCEN has released more than 100 FAQs to provide additional guidance. While many FAQs have clarified reporting requirements, some have created traps for the unwary or led to further questions that FinCEN has yet to address.

Several lawsuits have been filed in federal court challenging the constitutionality of the CTA, and multiple bills have been introduced in Congress proposing to amend or repeal the CTA entirely. These developments have added to the uncertainties surrounding the CTA.

Dissolved Entities
In July 2024, FinCEN issued new FAQs addressing reporting requirements for entities that "ceased to exist" prior to January 1, 2024, and for entities that existed on or after that date but cease to exist before their initial BOI report is due.

FinCEN confirmed that an entity that was "formally and irrevocably" dissolved before January 1, 2024, is not subject to CTA reporting requirements and does not need to file a BOI report. However, a reporting company that existed for any period in 2024 is required to file a BOI report—even if it began dissolution before January 1, 2024, but did not complete it before that date. This requirement also applies to any entity formed after January 1, 2024, that dissolves before its BOI report filing deadline.

This guidance raises several questions:

• How does a reporting company determine whether it "formally and irrevocably" ceased to exist on or before January 1, 2024?
• Given that BOI reports should be accurate as of the filing date, who does a previously dissolved entity report as its beneficial owners?
• Who is responsible for filing a BOI report for a previously dissolved entity?

Subsidiary Exemption
In January 2024, FinCEN provided additional guidance on the subsidiary exemption, which exempts entities whose ownership interests are "controlled or wholly owned" by certain other exempt entities. FinCEN clarified that the exemption applies only when the exempt entity "fully, 100 percent" owns or controls the ownership interests of the subsidiary reporting company. Control of ownership interests means the exempt entity entirely controls all ownership interests in the reporting company, just as an exempt entity must wholly own all of a subsidiary's ownership interests.

Therefore, a reporting company seeking this exemption must ensure that the exempt entity fully owns or controls, directly or indirectly, all of its ownership interests.

Legal Developments
As of this writing, there are at least nine ongoing federal court cases seeking to challenge the CTA's constitutionality. The most notable is National Small Business United v. Yellen, which we discussed in a prior alert. In that case, the U.S. District Court for the Northern District of Alabama held that the CTA is unconstitutional and permanently enjoined its enforcement—but only for the named plaintiffs. The federal government has appealed, but a decision is not expected soon. As a result, the tens of millions of other entities subject to the CTA still need to comply before their reporting deadlines.

Congress is also considering multiple bills proposing to extend the CTA's reporting deadlines or repeal the CTA entirely. However, these bills have not gained significant traction, possibly due to partisanship or the current election cycle. We continue to monitor these legislative efforts but do not expect any formal decisions before the upcoming year-end reporting deadline.

Next Steps and a Call to Action

When the CTA was enacted, FinCEN estimated that over 30 million reporting companies existing before January 1, 2024, would need to file their BOI reports by year-end. However, the number of BOI reports filed this year has fallen far short of projections. Reasons include a general lack of education and awareness, especially in the small business community. Some companies aware of their obligations have adopted a "wait-and-see" approach, hoping for deadline extensions or legislative changes.

The reality is that none of these changes have occurred, and the reporting deadlines remain in effect—including the January 1, 2025, deadline that is rapidly approaching.

Companies should take the following steps as soon as possible:

1. Determine if they are subject to the reporting requirements and, if so, identify their beneficial owners and, if applicable, company applicants.
2. Obtain the required information about their beneficial owners and company applicants.
3. Prepare and submit their BOI reports to FinCEN by the applicable deadlines.

Where questions or ambiguities exist, FinCEN encourages companies to err on the side of caution and overreport rather than underreport. We continue to advise our clients to do the same.

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