Beneficial ownership information reporting

In 2021, the Corporate Transparency Act passed as part of the annual National Defense Authorization Act. This provision was added to the final legislation, one of the few remaining bills Congress views as a “must-pass” each year. Proponents of the Corporate Transparency Act aim to combat illicit activities including tax fraud, money laundering and financing for terrorism by obtaining more ownership information for U.S. businesses.

Corporate Transparency Act requirements took effect Jan. 1. This means most entities incorporated or registered to do business in the U.S. must disclose information about their owners, officers and other key stakeholders. This information must be provided to the Financial Crimes Enforcement Network, which is part of the Department of Treasury.

Which entities must report?

The Corporate Transparency Act primarily will affect an estimated 32 million small businesses. Reporting companies required to comply must file initial reports by the following deadlines:

• Existing companies: Reporting companies created or registered to do business in the U.S. before Jan. 1, 2024, must file by Jan. 1, 2025.
• Newly created or registered companies: Reporting companies created or registered to do business in the U.S. during 2024 have 90 calendar days to file after receiving actual or public notice the company’s creation or registration is effective.

What information must be filed?

A reporting company’s beneficial owner is defined as an individual with substantial control over a given company or an individual who owns (or controls) at least 25% interest in the company. However, depending on a company’s structure, a business owner may have 1,000 employees and still be required to report under this law.

Generally, reporting companies must provide four pieces of information about each beneficial owner: name, date of birth, address and an identifying number. This number and issuer must be from either a nonexpired U.S. driver’s license, a nonexpired U.S. passport or a nonexpired identification document issued by a state, local government or Indian Tribe. A nonexpired foreign passport also is acceptable. All document types require an image to be provided.

Which companies are exempt?

Many larger companies are not required to comply with the Corporate Transparency Act or may be subject to other requirements. Large companies are exempt from the Corporate Transparency Act if they meet all the following criteria:

• Employ more than 20 full-time workers in the U.S.
• Operate physical offices in the U.S.
• Report more than $5 million in gross sales or receipts as evidenced by the previous year’s tax return

Status of judicial challenges

There have been numerous legal challenges regarding the Corporate Transparency Act. Earlier this year, a federal district court in Alabama held the Corporate Transparency Act is unconstitutional.

The opinion states “while the legislation may have sensible and praiseworthy ends,” the government’s arguments that Congress has “the power to regulate millions of entities and their stakeholders the moment they obtain a formal corporate status” from a state “are not supported by precedent.” The act “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any numerated power to be a necessary or proper means of achieving Congress’ policy goals,” the opinion notes. Unfortunately, relief was only provided to the plaintiffs in this case. The number of active challenges include:

• Alabama (appealed): NSBA et al v. Yellen (Nov. 15, 2022)
• Maine: William Boyle v. Yellen (March 15, 2024)
• Massachusetts: BECMA et al v. Yellen (May 29, 2024)
• Michigan: Small Business Association of Michigan et al v. Yellen (March 1, 2024)
• Ohio: Robert J. Gargasz Co. L.P.A. et al v. Yellen (Dec. 29, 2023)
• Texas: NFIB et al v. Yellen (May 28, 2024)

NSBA et al v. Yellen is due to be heard before the 11th Circuit this month, putting a ruling by that court possibly before the end of 2024.

Legislation in Congress

In December 2023, the House of Representatives passed bipartisan legislation (H.R. 5119) to extend Corporate Transparency Act deadlines by a vote of 420-1. Also, more than 80 senators and representatives sent a letter to the Financial Crimes Enforcement Network calling for a one-year delay of Corporate Transparency Act reporting requirements. However, the Senate has yet to take up this legislation. NRCA sent a letter with coalition partners to encourage Congress to delay these actions for one year at a minimum and sent another letter to support legislation to fully repeal the Act, introduced by Sen. Tommy Tuberville (R-Ala.) and Rep. Warren Davidson (R-Ohio).

In June, the House Financial Services Appropriations subcommittee released its funding bill for fiscal year 2025. This legislation includes a provision that prohibits funds from being used for the Financial Crimes Enforcement Network to promulgate the beneficial ownership reporting rules that have been found unconstitutional or do not reflect Congressional intent. It is unclear whether the Senate will agree to this provision as a part of the larger bill and whether the provision is enforceable given it was the statue and not the rules that were found to be unconstitutional.

Additionally, lawmakers are considering reintroduction of the ENABLERS Act, which expands the Corporate Transparency Act’s reporting requirements by subjecting business owners, senior officers, lawyers, accountants and others to additional oversight under the Bank Secrecy Act.

Where do we go from here?

If you believe your company falls into the category of those required to report, you should begin determining your obligations as soon as possible. The Corporate Transparency Act has rules about how to count employees, consider office space and total profits across affiliates, so make sure you understand those guidelines.

NRCA continues to work diligently with Congress and the Department of Treasury to gain greater clarification regarding this law and either repeal or delay its implementation.

Editor’s note: The information contained in this article is for general educational information only. It does not constitute legal advice nor should it be relied upon as legal advice.

DEBORAH MAZOL is NRCA’s director of federal affairs in Washington, D.C.