Earlier this year we started issuing a series of SKO Insiders on the Corporate Transparency Act, which requires most businesses to file a federal report with information about its “beneficial owners” and other details. Then, a federal District Court in Alabama found the CTA to be unconstitutional, but issued relief to only the members of the plaintiff trade association, National Small Business United. Shortly thereafter several similar lawsuits were filed across the country even as the U. S. Department of Justice filed an appeal of the Alabama decision to the 11th Circuit Court of Appeals. Most recently, on September 20, a federal district court in Oregon upheld the CTA against a number of challenges. While SKO’s attorneys have continued assessing this new law in preparation for advising on it, there remain significant unknowns, including the appeal to the 11th Circuit. Meanwhile, groups such as the AICPA have lobbied to request a delay in the initial filing deadline, currently set for January 1, 2025. Recently, that proposal was rejected by the Treasury Department. While the 11th Circuit Court of Appeals might ultimately hold that the CTA is unconstitutional, we can of course make no assurances to that effect. We can assure you, in contrast, that all companies that existed as of January 1, 2024, still have a CTA filing deadline of January 1, 2025. Essentially, it is time to determine whether an exemption from CTA exists for your companies, and if not, to get the filings done.
We are closely tracking the CTA litigation and all other developments and will publish updates with any changes. We also plan to provide further SKO Insiders with compliance information as the deadline approaches.
Beware of Bad and Even Outright Wrong Information on the CTA
There is a great deal of information floating about as to the Corporate Transparency Act (the “CTA”), and we hope you find this series of SKO Insiders to be a reliable and practical resource. That said, among the information floating about is a great deal that is incomplete and even flat-out wrong. Recently we found the following posting on CTA compliance, which misleadingly stated:
Unites States is requiring all LLCs and Corps to file a BOI report. You basically have to list every beneficial owner of your company. I don’t own anything. My trust owns my holding company which owns my LLCs which own all my assets. I’m just the manager. Trusts can be excluded from filing.
Unfortunately, almost everything about this “advice” is incorrect. So, let’s break it down.
| What was said | The truth |
| Unites States is requiring all LLCs and Corps to file a BOI report. | Primarily true, but incomplete for not including other business forms subject to the CTA and the possibility of exemption from reporting for some entities |
| You basically have to list every beneficial owner of your company. | It is not “basically”; the CTA requires you to identify every beneficial owner. You also have to submit other information related to the Company. |
| I don’t own anything. | Almost certainly not true; if you are the trustee of your trust or have the ability to direct the trustee then you, for purposes of the CTA, own the assets in the trust. Not that it matters – as addressed below. |
| My trust owns my holding company which owns my LLCs which own all my assets. | This overlooks the CTA reporting obligation that arises for each level of each company. Each of your LLCs is obligated to file its report identifying its beneficial owners, and the “holding company” needs to report its beneficial owners. In this example, there are at least three reports to be filed. |
| I’m just the manager. | This actually results in you being a beneficial owner of that LLC. |
| Trusts can be excluded from filing. | Most donative (as contrasted with business) trusts are not reporting companies. However, if the trust holds all of the interests in the “holding company,” which is a reporting company, then the trustee is a beneficial owner and an analysis must be made regarding who else needs to be identified in the holding company’s required filing. |
We hope this impresses the need to work with an attorney who has undertaken the necessary study of the CTA and is committed to staying up to date with this rapidly evolving area of the law. SKO’s CTA Practice Group is prepared and willing to examine the nuances of the CTA on a client’s behalf. In the meantime, please keep an eye out for further SKO Insiders as we start to delve into the substantive workings of the CTA.
Penalties Under the CTA?
Under the CTA statute and the regulations governing what must be reported, there are a variety of penalties for non-compliance. The CTA defines both the prohibited conduct and the penalties that may attach. As to the former:
REPORTING VIOLATIONS. —It shall be unlawful for any person to —
(A) willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with subsection (b); or
(B) willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with subsection (b).
And what happens if you do just that?
REPORTING VIOLATIONS. —Any person that violates subparagraph (A) or (B) of [the above quoted] paragraph —
(i) shall be liable to the United States for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and
(ii) may be fined not more than $10,000, imprisoned for not more than 2 years, or both.
You may have heard about the $500 per diem penalty. In actuality, the $500 was written into the law in 2020, and it is adjusted for inflation; as of now, it is $591 a day. Also, it applies not to the reporting company but rather to each person at the company that should have in FinCEN’s view made sure an accurate report was filed. That means that, for example, each of the CEO, the CFO and the president may be held responsible for $591 per day until a report is filed. Those are “civil penalties.” There is also criminal exposure; that is where the $10,000 “fine” comes into application as well as the risk of up to two years in prison.
So, non-compliance with the CTA carries substantial financial penalties and fines and the possibility of imprisonment. Before getting to who (including the reporting company) is potentially liable for these penalties, let’s consider how they might be applied. Consider a corporation that is incorporated on March 1, 2024; it had 90 days within which to file its initial report of beneficial ownership – let’s say that day was July 1, 2024. But no report was filed that day, so the $591 per day fine started to accrue and accumulate, and FinCEN determines it should be assessed against the corporation’s CEO, CFO and the president. Now let’s assume that on July 1, 2024, one of the people who should have been identified as a beneficial owner in the never filed report changed her residential address. A change in a beneficial owner’s residential address triggered (assuming she was not using a FinCEN Identifier, and, in this hypothetical, she was not) an obligation for the reporting company to update its report, typically within 30 days. For whatever reason, our company still made no filing with FinCEN, and guess what, the (as of this year) $591 a day penalty starts accruing again against each of the three above names officers because the company “willfully fail[ed] to report complete or updated beneficial ownership information to FinCEN.”
There is a curious gap in the CTA with respect to beneficial owners, who may be distant shareholders or other owners with little if any connection to the business other than receiving notice of meetings (often ignored) and receiving dividend/distribution checks (typically promptly cashed). Often, the business will have no way to compel a beneficial owner to provide the required information if and when it is determined they are a beneficial owner (upcoming SKO Insiders will go into the definitions of a “beneficial owner” and the information required thereof).
FinCEN has made it clear that those persons have an obligation to provide that required information to the reporting company. In an FAQ issued last December FinCEN wrote:
Existing reporting companies should engage with their beneficial owners to advise them of this requirement, obtain required information, and revise or consider putting in place mechanisms to ensure that beneficial owners will keep reporting companies apprised of changes in reported information, if necessary. Beneficial owners and company applicants should also be aware that they may face penalties if they willfully cause a reporting company to fail to report complete or updated beneficial ownership information.
While we can debate FinCEN’s authority to impose the threatened penalties, it is beyond debate that the expense of being the test case far exceeds the potential benefits. For that reason, reporting companies will want to do all they can to collect and file the necessary information.
And that is why you really need to care about complying with the CTA!
As we noted in an earlier CTA Series Insider, in NSBU v. Yellen, the Federal district courts for the northern district of Alabama declared the CTA to be unconstitutional. As of now the case is on appeal to the 11th Circuit Court of Appeals. The relief granted to date is limited to certain members of the National Small Business United/National Small Business Association. For all other companies, the CTA remains in full force and effect, including all filing requirements and deadlines, and we recommend that you continue your compliance efforts.
Please do not hesitate to contact your contact attorney at SKO or a member of the CTA Practice Group to help you in getting ready for these new filing requirements.
