Update March 12, 2024.
On March 1, 2024, in a case brought by the National Small Business Association (“NSBA”) and one of its members, a federal district court in the Northern District of Alabama ruled that “the Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.” The CTA establishes the Beneficial Ownership Information (or “BOI”) reporting requirements (as described further below). In so holding, the court enjoined the government from enforcing the CTA against the plaintiffs in that action. In response to the decision, FinCEN announced that it is not enforcing the CTA against the plaintiffs, a group that includes all members of the NSBA as of March 1, 2024, and that those individuals and entities are not required to report beneficial ownership information to FinCEN at this time. The FinCEN announcement did not reference the impact of the court ruling on any other companies (i.e., companies that are not amongst the approximately 65,000 members of the NSBA).
We expect the government to appeal the Alabama ruling and note that a similar case has been brought by other plaintiffs in a federal district court in the Northern District of Ohio. It is very possible that additional challenges to the CTA will arise and that the constitutionality of the CTA may ultimately be decided by the U.S. Supreme Court. At this time, because the ruling only bars FinCEN from enforcing the CTA against the plaintiffs and does not apply more broadly, we recommend that companies subject to the CTA continue to evaluate their beneficial ownership and gather appropriate documentation in order to file their beneficial ownership reports within the CTA’s deadlines.
For companies who are members of the NSBA (and thus are not required to report their beneficial ownership), we recommend that if the member company does not file beneficial ownership reports, that such company maintain documentation to show it was a member in good standing of the NSBA as of March 1, 2024. These companies should closely monitor the pending litigation in Alabama (and FinCEN’s responses to the litigation). For NSBA members operating within more complicated structures where there may be more than one legal entity (but only one NSBA member company), we recommend that they seek appropriate legal counsel to evaluate how the court ruling will impact each of their entities.
CPAs asked by their clients about the applicability of the Alabama ruling on their beneficial ownership reporting requirements are urged to be mindful of providing advice that could be construed as the unauthorized practice of law.
——————————————————————————————————————-
Originally posted:
On January 1, 2024, the Corporate Transparency Act (“CTA”), a federal law intended to aid in official “efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes” went into effect. Most small businesses are now subject to this onerous requirement to report their ownership to the Financial Crimes Enforcement Network (“FinCEN”) at the U.S. Department of the Treasury, including any changes and updates.
Beneficial Ownership Information (“BOI”) Reporting Requirements
What companies are required to report? Legal entities required to report (a “Reporting Company”) include corporations, limited liability companies and any entity that was created by filing a document with a secretary of state or similar office under the law of a U.S. state or Indian Tribe. Foreign entities registered to do business in the United States are also Reporting Companies. There are 23 types of entities that are exempt from the reporting rules. These exempt entity types include: publicly traded companies; highly regulated companies such as investment advisers, insurance companies, banks, utilities, etc.; public accounting firms registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002; governmental authorities, and “large operating companies.” In general, a large operating company is defined as an entity with a physical office in the U.S., employing more than 20 full time employees in the U.S., and which filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales (net of returns and allowances) from U.S. sources. Tax-exempt entities described in Section 501(c) of the Internal Revenue Code are also exempt from the BOI reporting requirements.
Determining Beneficial Owners. The CTA requires a Reporting Company to report beneficial ownership information to FinCEN. A “beneficial owner” is any individual who, subject to a handful of exceptions, directly or indirectly exercises substantial control over an entity OR owns and controls at least 25% of the entity’s ownership interests. While determining beneficial ownership is straightforward for most businesses, both tests involve considerable nuance. In particular, evaluating what individuals exercise “substantial control” over an entity will in many instances require considerable factual analysis and judgment, such as whether any additional persons (other than the company’s senior officers) have “substantial influence over important decisions” of the company’s business, finances, or structure.[1]
How should the BOI report be filed?
The BOI report must be filed electronically through FinCEN’s secure filing system.
What information must be filed?
The BOI report must contain the following information about the Reporting Company:
- Full legal name of the Reporting Company
- Any trade name or d/b/a name of the Reporting Company
- Complete current address of the Reporting Company
- State, Tribal, or foreign jurisdiction of formation of the Reporting Company
- For a foreign Reporting Company, the State or Tribal jurisdiction where the company first registers
- The IRS Taxpayer Identification Number (“TIN”), including an EIN, of the Reporting Company
- A foreign company without a TIN will report a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction.
The BOI report must also contain the following information about each beneficial owner:
- The full legal name of the individual
- The date of birth of the individual
- A complete current address of the individual, or in the case of an applicant who files in the course of the applicant’s business, the street address of the business
- A unique identifying number and the issuing jurisdiction from a current U.S. or foreign passport, driver’s license, or government ID card
- An image of the document from which the unique identification number was obtained
In lieu of the Reporting Company having to provide the detailed information on the company report, upon request, FinCEN will issue to an individual or reporting company a “FinCEN identifier”. This is a unique identifying number that FinCEN will issue to an individual or reporting company who separately provides the required information to FinCEN. The use of FinCEN identifiers alleviates privacy concerns and eases compliance by avoiding the need to share personal information (such as a driver’s license or passport) and having to repeat names, addresses, and ID documentation in cases where an individual or company’s information is being provided on multiple reports.
Entities created in 2024 and after must also report identifying information about the “company applicant,” that is, the person who files the document that creates the domestic Reporting Company or that registers the foreign Reporting Company in a U.S. jurisdiction.
When is the Report Due?
For Reporting Companies that were registered prior to January 1, 2024, the BOI report needs to be filed by January 1, 2025. For legal entities newly created or registered in 2024, the law provides 90 days in which to file the BOI report; in future years it will be only 30 days.
Contemporaneous Updates Required: Moreover, in addition to the deadlines for the initial report, the CTA requires an updated report within 30 calendar days of any change to the previously submitted information regarding a Reporting Company or its beneficial owners. This will require careful and ongoing monitoring of changes to previously reported information (including any information provided in connection with applying for a FinCEN identifier). For example, such changes include changes in beneficial owners such as a new Chief Executive (or other Senior Officer) or the change in a 25% direct or indirect ownership interest by a sale. This could also include a minor child’s attaining the age of maturity or the settlement of an estate that impacts an ownership interest. Noteworthy, even minor changes to previously reported information (such as a beneficial owner’s changing their name or address) trigger the requirement to file an updated report.
Potential Criminal and Civil Penalties!
The CTA provides criminal and civil penalties for willfully providing false or fraudulent BOI in a report, or willfully failing to report BOI. The civil penalty is up to $500 per day that the violation continues without remedy, and the criminal penalty is a fine of up to $10,000 or up two years in prison, or both. There is a safe harbor for those who submit a corrected report within 90 days of submitting a report containing false information.
Potential Issues for CPAs
As a practical matter, because a company’s or individual’s CPA is often the professional advisor most attuned to business ownership – and with whom the business owner engages most regularly – the CPA may be in the most convenient position to advise their client of the BOI reporting requirements. At a minimum, we strongly recommend that CPAs familiarize themselves with the CTA and its beneficial ownership requirements. One source is FinCEN’s Beneficial Ownership Information page. Of particular importance, CPAs[2] need to be very cautious when advising clients on determining who qualifies as a beneficial owner (and other aspects of BOI reporting and the CTA) because the CPA could be deemed as engaging in the unauthorized practice of law (“UPL”).[3]
As of the date of this Buzz, no authoritative guidance has been issued in Ohio (or to the best of our knowledge, in any other state) with respect to whether a CPA who advises on these matters is engaging in UPL. Until any such guidance has been issued in both the state where the CPA firm resides (and if different, in the state where the client resides), CPAs should proceed very cautiously to avoid being subject to penalties associated with UPL.
CPAs should also be aware that professional liability policies typically exclude coverage for claims based on, or arising from, a criminal act. Even if a criminal act is not alleged, a claim associated with UPL could be deemed to be outside of the scope of liability coverage. We take no position on this but point this out to remind CPAs to seek appropriate risk management guidance from their insurance carrier. While by no means a complete list, some other useful guidance may be found at Risk Management and the CTA (by AON/AICPA) as well as at CTA Risk Management FAQ’s on the website of CAMICO, a national professional liability carrier serving CPAs.
* * * * *
This Buzz provides general information only and should not be used as a guide to compliance with the CTA’s reporting requirements. If you have further questions on the CTA or BOI reporting, please contact Derek Heyman, H.T. Astrov, or any of our legal professionals.
[1] In general, the performance of ordinary, arms-length advisory or other third-party professional services to a Reporting Company should not subject the advisor to the reporting requirements. Thus, in ordinary circumstances, a CPA or legal professional who files a Form 2848 with the IRS to act as a Reporting Company’s agent would not be considered to be exercising substantial influence. See Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498, 59,527 (Sept. 30, 2022).
[2] The same risk would apply to other non-attorney professionals who provide advice regarding the CTA.
[3] Naturally, this begets the question of why advising on the CTA differs from the types of matters that CPAs (and others) regularly advise their clients on. By way of background on UPL, in Sperry v. Florida, 373 U.S. 379 (1963), the U.S. Supreme Court concluded that although the Florida Bar determined that the services provided by a nonlawyer patent practitioner (who was registered to practice before the U.S. Patent Office) constituted UPL, the Supremacy Clause of the U.S. Constitution prohibited Florida from denying the practitioner his federally granted rights to perform patent services. With regard to matters within its jurisdiction, 31 U.S.C. § 330(a)(1) permits the Treasury Department to regulate the practice of representatives of persons before the Department of the Treasury. Pursuant to this authority, Treasury has promulgated Regulations Governing Practice before the Internal Revenue Service, 31 C.F.R. Subtitle A, Part 10 (June 12, 2014), more commonly referred to as “Circular 230.” Under the logic of Sperry, CPAs and enrolled agents who derive their authority to practice before the IRS pursuant to Circular 230 are not subject to UPL restrictions when practicing before the IRS. But the CTA is codified in Title 31 (Money and Finance) of the U.S. Code, not Title 26 (Internal Revenue Code). Thus, because no federal agency has issued rules governing practice before FinCEN, and CTA-related services are not covered by Circular 230 or any similar federal provision, federal preemption under the Supremacy Clause may not apply. Absent guidance from the States (and State Bars), depending on the specific work being performed, there is a risk that States could deem practitioners advising on the CTA as engaging in UPL.