The Corporate Transparency Act (CTA) was signed into federal law as part of the National Defense Authorization Act (NDAA) for 2021. The CTA did not take effect until January 1, 2024, and a court challenge in the United States District Court for the Northern District of Alabama ended with a ruling that the law’s requirement of beneficial ownership information (BOI) is unconstitutional.
In the case of National Small Business United et al. v. Yellen et al., No. 5:22-cv-01448, Dkt. 52 (N.D. Ala 2024), the court ruled that the CTA exceeded the enumerated powers of Congress and that the legislative powers the government cited in the case did not confer the authority for this legislation.
In addition to declaring the CTA unconstitutional, the court’s judgment entered a permanent injunction preventing the government from enforcing the CTA as to the plaintiffs in the case. For the time being, the law may still be enforced against other entities.
The goal of the CTA, as the name suggests, is to increase corporate transparency and, by extension, prevent “shell companies” from engaging in money laundering and funding other illicit activities, including terrorist activities. So why is an estate planning law firm writing about the CTA? Because it also affects families and individuals who use corporations, LLCs, and other corporate entities as part of their estate planning. Because certain types of trusts, both revocable and irrevocable, are often held in these entities, or own corporate entities, they may be subject to the requirements of the CTA.
What is the Corporate Transparency Act?
The Corporate Transparency Act is 22 pages of fine print, so we won’t cover it all in a blog post, but we will break down some of the fundamentals of the CTA. In a nutshell, entities to which the CTA applies (“reporting companies”) must report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Treasury Department.
What is a “Beneficial Owner?”
A “beneficial owner” is an individual who either exercises “substantial control” over a reporting company, or controls at least 25% of the “ownership interests” of a reporting company.
This control or ownership may be either direct or indirect; FinCEN is more interested in who really has an ownership interest in an LLC or other entity, rather than who is an owner “on paper.” For instance, if XYZ LLC has a 30% ownership interest in ABC LLC, and John Smith is the sole member of XYZ LLC, John Smith would be considered a beneficial owner of ABC LLC.
What Entities Must Report Under the Corporate Transparency Act?
The CTA refers to “reporting companies,” which are generally privately-held companies like corporations and LLCs formed in the United States. However, there are 23 categories of entities that are exempt from these reporting requirements, such as public companies listed on a U.S stock exchange, banks, and public utilities.
While a trust itself is not a reporting company, a trust that owns or controls at least 25% of a reporting company must comply with the CTA. A trustee of such a trust, or someone else with the authority to dispose of trust assets, like a trust protector, would be considered a beneficial owner. So would a grantor of the trust if they had the power to revoke the trust or withdraw its assets. Trust beneficiaries are generally not considered beneficial owners unless they are the only permissible recipient of trust income and principal, or if they have the authority to demand distribution of substantially all of the trust assets.
High net worth individuals who use LLCs and other reporting companies to manage investments and protect assets are likely to be subject to the CTA’s reporting requirements. Tax-exempt entities such as charitable trusts and private foundations are generally not considered “reporting companies” for purposes of the CTA. That said, if a charitable organization has its tax-exempt status revoked for some reason, and that status is not reinstated within 180 days after it is revoked, it is likely to be considered a reporting company subject to CTA reporting requirements.
When Must Beneficial Ownership Information Be Reported?
For reporting companies that were created before January 1, 2024, beneficial ownership information (BOI) must be reported in a filing by January 1, 2025. Reporting companies created on or after January 1, 2024 must file their BOI report within 30 days after they register as a business entity. Reporting companies may file prior to those deadlines, but FinCEN did not begin accepting report filings until January 1, 2024.
What Happens if an Entity Doesn’t Comply with Reporting Requirements?
A responsible party that fails to comply with the Corporate Transparency Act’s reporting requirements could be subject to both civil and criminal penalties under some circumstances.
A willful failure to file a complete or updated report with FinCEN may subject a party to civil penalties including a fine of $500 per day, up to $10,000 per violation. In addition, such a violation carries a criminal penalty of up to two years’ imprisonment. The same penalties apply to willfully providing, or attempting to provide, a report that contains false or fraudulent information.
In short, failure to comply with the CTA is no joke, and simply hoping that you are in compliance (or that non-compliance will fly under the radar) is not a valid strategy.
What Should I Do to Ensure I’m in Compliance With the CTA?
For the time being, entities other than those addressed in National Small Business United et al. v. Yellen et al. should assume that they are still subject to the CTA.
If you are a beneficial owner of an entity that is subject to the Corporate Transparency Act, or are not sure if the CTA applies to you, you should consult with your estate planning attorney. Your attorney can help you identify whether you have reporting obligations under the CTA, and may be able to reduce the number of individuals who are considered beneficial owners of a reporting company through a trust.
To learn more about the Corporate Transparency Act, its requirements, and how it affects your estate plan, contact our law offices. We are keeping abreast of continuing legal developments regarding the CTA.
The knowledgeable estate planning attorneys at Barron, Rosenberg, Mayoras & Mayoras work with clients regarding trusts, asset protection, and other high net worth estate planning issues. Schedule a consultation today by calling (248) 213-9514 in Michigan or (941) 222-2199 in Florida to learn how we can assist you. You can also use our simple online contact form.