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Opinion: Corporate Transparency Act faces uncertain future

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The new year has brought forth new developments in the ever-changing saga that has been the implementation of the Corporate Transparency Act. Originally enacted in 2021, the CTA has long been a source of controversy among legal practitioners, small-business owners and politicians. With the Jan. 1, 2025, reporting deadline already having come to pass, it remains important for business owners to be aware of how the CTA affects them and the recent legal challenges that have prevented full enforcement of the CTA’s mandates.

Reporting requirements
The CTA requires “reporting companies” to provide information to the Financial Crimes Enforcement Network regarding the “beneficial owners” of each reporting company. Reporting companies are very broadly defined to include any business entity that is created through the filing of a document with the state. This definition is broad enough to cover practically all business entities (LLCs, corporations, partnerships), but the CTA carves out a number of exceptions to this definition for businesses that are already highly regulated. For instance, banks, insurance companies, CPA firms and large operating companies (defined as having more than 20 full-time employees, a physical office within the United States, and more than $5 million in gross receipts or sales) are exempt from reporting.

The definition of beneficial owners is likewise incredibly broad. Beneficial owners are defined as anybody who either owns at least 25% of the reporting company or exercises “substantial control” over the reporting company. This definition includes everybody from passive investors to officers in the reporting company. Each individual meeting the definition of a beneficial owner must be reported to FinCEN. Failure to provide information on beneficial owners can result in penalties ranging from $500 to $10,000 per violation.

Enforcement, legal challenges
Several lawsuits have been launched in courts across the country challenging the constitutionality of the CTA. Most notable is the recent case of Texas Top Cop Shop, Inc. v. Garland. In that case, a business based out of Texas challenged the constitutionality of the CTA and sought an injunction to prevent the government from enforcing the requirements of the CTA. A Texas federal court agreed with the plaintiffs and issued a nationwide injunction preventing the government from enforcing the provisions of the CTA. After much back and forth in the 5th Circuit Court of Appeals, the injunction was allowed to stay in place, meaning that anybody who has thus far failed to abide by the CTA is not yet subject to penalties.

However, the government has now sought relief from the Supreme Court, and the future of the CTA hangs in the balance. Should the Supreme Court agree with the government’s position, the reporting requirements will once again become applicable. Because the prospect of enforcement is still present, it remains important for business owners to remain vigilant.

Uncertainty surrounding CTA
With the future of the CTA looking so uncertain, many companies are asking themselves, “What should we be doing about this?” As of the time of this writing, FinCEN is still accepting voluntary submissions of beneficial ownership information reports. This means that any company desiring to play it safe can voluntarily file a report disclosing their beneficial ownership information. However, many companies are rightfully concerned about privacy, and they do not wish to disclose any more information to the government than is strictly necessary. For those companies, waiting to file a report is allowed, but there is a certain amount of risk in waiting to file.

If the Supreme Court disagrees with the 5th Circuit, companies could be forced to comply within a rather short time frame. Though one would hope that FinCEN would delay enforcement until some reasonable amount of time after the Supreme Court renders their decision, there is no guarantee that this will be the case. Therefore, it is imperative that all reporting companies, regardless of what they believe regarding the merits of the Texas Top Cop Shop case, prepare and have on file the necessary beneficial ownership information. A failure to have this information ready at a moment’s notice could cause companies to miss their reporting deadlines, which would in turn subject them to massive penalties and potential criminal liability.

Brett Hodges is an attorney with the law firm of Carnahan Evans PC. He can be reached at bhodges@carnahanevans.com.

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