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The Corporate Transparency Act Conundrum

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John Legaré Williams

So far two million small business owners have woken up to the new federal reporting requirements in 2024 under the Corporate Transparency Act (CTA). That may seem like a large number, but it is only 5% of the 36 million businesses needing to file before the end of 2024. Tens of millions of business owners and managers need to snap awake. Each is at risk of $10,000 fines and long prison sentences if they ignore this new reporting requirement, miss the December 31, 2024 deadline, and Treasury files an enforcement action against them.

Entrepreneurs and other business owners generally are afraid of the U.S. Treasury Department and the IRS, but are not familiar with FinCEN, the enforcement arm of Treasury. FinCEN will soon start filing enforcement actions against potentially millions of innocent small business owners. Waiting to file your beneficial ownership after fines accrue is not smart business planning.

This new requirement is real and has not faded away, despite misleading information on the internet. Inaction through ignorance of the law or misunderstandings of the law is no excuse to avoid $10,00 fines and jail time. It is high time every entrepreneur comes out of the fog. Entrepreneurs and even people who set up an LLC that owns a house or does nothing need to file their report without waiting until the last minute.

Many have seen headlines that a federal court declared the law unconstitutional and asserting that the Beneficial Ownership Information Report (BOIR) requirements are no longer valid against the plaintiffs in the case. However, these claims are misleading. The fines and jail time for not complying with the Corporate Transparency Act are similar to those of bringing a gun to the airport, to put this in perspective.

Reporting Requirements Under the CTA

The Corporate Transparency Act (CTA) requires American companies to report beneficial ownership information including control parties to the U.S. federal government. Specifically, the CTA mandates that U.S. business entities disclose details about their natural human beneficial owners with at least a 25% interest or anyone including non-owners with substantial control to the Financial Crimes Enforcement Network (FinCEN) by filing a Beneficial Ownership Information Report (BOIR).

FinCEN has set strict deadlines for these BOI Reports. New entities formed in 2024 must file reports within 90 calendar days of the company’s official formation date. Meanwhile, companies that were already in existence before 2024 must file their reports before January 1, 2025.

Recent Legal Rulings On the Corporate Transparency Act

On March 1, 2024, the U.S. District Court for the Northern District of Alabama issued a 53-page opinion declaring the Corporate Transparency Act (CTA) unconstitutional, but it only applies to the plaintiffs in the case and not everyone else. Plus, the case is on appeal to the 11th Circuit, a process which is expected to take 11 months.

You may have heard that 22 state attorneys general joined an amicus brief on why the law hurts their economics and impinges upon state sovereignty in the area of corporate governance, traditionally an area governed by state laws, not federal law.

The ruling from the Northern District of Alabama came as a result of a lawsuit filed by the National Small Business Association (NSBA), which alleged that the Corporate Transparency Act (CTA) violates the First, Fourth, Fifth, Ninth, and Tenth Amendments to the Constitution in addition to overstepping powers reserved to the states and not delegated to the federal government by the Constitution.

The ruling stated Congress exceeded its enumerated powers by attempting to regulate even entities not engaged in commerce.

The Constitutionality Debate

The federal judge from the Northern District of Alabama ruled that the Corporate Transparency Act (CTA) “transcends the limits imposed by the Constitution on the legislative branch and lacks a strong connection to any enumerated power to serve as a necessary or appropriate means to achieve Congress’ policy objectives.” In simpler terms, the judge concluded that the U.S. Constitution does not permit Congress to enact a law like the CTA.

The Road Ahead: Lawsuits and Potential Supreme Court Decision

Since the ruling in Alabama, two additional lawsuits concerning the Corporate Transparency Act (CTA) have been filed. One lawsuit was filed in the U.S. District Court of Maine, and the other in a U.S. District Court in Michigan.

However, what would be more impactful to the Corporate Transparency Act (CTA) than these District Court cases is a potential ruling by the U.S. Supreme Court. The government has appealed the Alabama Northern District Court’s decision, and the appeals process will likely bring the case before the highest court in the land. This would place the fate of the CTA in the hands of the Supreme Court. The problem is that such a final ruling is years away. In the meantime, 36 million businesses still need to comply.

What Does This Mean for Small Businesses?

What exactly does this ruling mean? It certainly does not mean that America’s small businesses are off the hook for Beneficial Ownership Information Reporting. The ruling from Alabama applies only to the plaintiffs in the case, which includes businesses that were members of the National Small Business Association (NSBA) as of March 1, 2024, plus other named plaintiffs. It does not even apply to other businesses in Alabama.

As the law currently stands, reporting companies still need to file reports to FinCEN by the stated deadlines to avoid penalties. This includes over 36 million existing businesses that need to file by the end of the year.

How Small Business Owners Should Manage The CTA

So what are small business owners to make of these developments, and how should they account for them in their compliance plans? Until the Corporate Transparency Act is officially resolved, compliance is required. The criminal penalties and fines for non-compliance have teeth, making them far too costly to risk ignoring. As one American Bar Association article was titled, “Corporate Transparency Act: Deniers Beware.”

Average small business owners may think that FinCEN does not have the resources to enforce this law. FinCEN says that they plan to focus enforcement actions on the truly bad actors. However, FinCEN could also, through the Treasury, delegate enforcement to the IRS, in which case business owners may become targets for audits simply for failing to timely comply with CTA filings.

Mom and Pop entrepreneurs may be treated like white-collar criminals for violating FinCEN’s nuanced reporting requirements. Simple mistakes or typos in reporting can lead to civil penalties, costing $591 per day. More serious violations or willful noncompliance can lead to criminal penalties, including fines of up to $10,000 per violation and up to two years in jail. If the CTA violation is coupled with other financial crimes, those fines increase to $100,000 per violation and up to 10 years in jail.

Advice For Business Owners

Given the complexity of the reporting requirements and the severe penalties for non-compliance, it is crucial to understand your obligations under the Corporate Transparency Act (CTA).

CTAboi’s Ryan Hurley has seen many seasoned and well-educated entrepreneurs make rookie mistakes on BOI Reports. Do it alone, and you will feel good when you receive the message “filing successful” from FinCEN. Only problem there is that the message displays even when the report contains errors. CTAboi has seen many rookie mistakes requiring correction filings within 30 days. Using a filing service like CTAboi.com makes filing corrections and updates much easier.

Don’t Navigate These Waters Alone.

It is recommended to seek advice from legal professionals to ensure that your business meets all its reporting deadlines without errors and is prepared for any future changes in the law. Legal experts can provide tailored advice that considers your specific business circumstances and helps you develop a robust reporting plan.

Plan Ahead and Stay Informed.

Engage a legal professional to review your current compliance plan and anticipate potential challenges. This proactive approach can help protect your business from legal risks but also prepares you to adapt to any future changes in FinCEN’s BOIR regulations.

You may also select a service that stores your information to help make future updates easier. Using a service like CTAboi.com can help reduce incidents of filing mistakes and complete the filing in a more secure manner. Concierge service is also available through The Williams Law Firm P.A.

A denialist is a person who denies the existence, truth or validity of something despite proof or strong evidence that it is real, true or valid. For those of us who prefer to remain in reality, the denialists represent a conundrum. One way to overcome denial is to seek support from an objective perspective. Consider the consequences and think about what could happen if you do not take action. If you appreciate your freedom and have better things to spend $10,000 on than giving it to the government, file your Beneficial Ownership Information Report with FinCEN today, or at least before the end of 2024 (and keep it updated).

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John Williams

John Legaré Williams, Esquire practices business law through The Williams Law Firm, P.A. (www.TrustWilliams.com). He is also President of Agents and Corporations, Inc. (www.IncNow.com), a Certified B Corporation that provides filing and registered agent services in Delaware to business owners from around the world. Nationally, Mr. Williams is a frequent speaker nationally on the topic of Delaware LLCs and in particular the Delaware Series LLC, the most cutting-edge entity on the market. Last year he founded CBAboi LLC (CTAboi.com) to file beneficial ownership information reports required by the Corporate Transparency Act.

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