Developments: On Friday, March 1, 2024, in National Small Bus. United v. Yellen, Judge Liles C. Burke of the United States District Court for the Northern District of Alabama ruled via memorandum opinion that the Corporate Transparency Act (CTA)1 , enacted in 2021, is unconstitutional because Congress lacks the authority to require companies to disclose personal stakeholder information to the Financial Crimes Enforcement Network (FinCEN), the criminal enforcement arm of the US Department of the Treasury. The National Small Business Association (NSBA), an Ohio nonprofit organization representing more than 65,000 businesses from all 50 states, and Issac Winkles, an NSBA member and owner of two small businesses, brought suit against the US Department of the Treasury and Treasury Secretary Janet Yellen, alleging that the mandatory disclosure requirements imposed by the CTA exceeded Congress’s authority under Article I of the US Constitution and violated the First, Fourth, Fifth, Ninth, and Tenth Amendments.
The court determined that the plaintiffs were entitled to summary judgment as a matter of law because the CTA could not be justified as an exercise of Congress’s enumerated powers, rejecting the argument that Congress had the power to enact the CTA under its foreign affairs powers, Commerce Clause authority, or as a necessary and proper exercise of its taxing power. It declined to address whether the CTA violates the First, Fourth, and Fifth Amendments. The court granted the plaintiffs’ motion for summary judgment and request for relief and entered a final declaratory judgment that the CTA is unconstitutional because it exceeds the limits imposed by the US Constitution on Congress’s power, permanently enjoining the defendants and any other agency or employee acting on behalf of the United States from enforcing the CTA against the plaintiffs.
Takeaways: At this time, the CTA cannot be enforced against the particular plaintiffs in this particular case, but the court’s decision in National Small Bus. United (which will likely be appealed) could ultimately have far-reaching consequences.
Background: As of January 1, 2024, millions of small businesses that meet the definition of a reporting company2, including corporations, limited liability companies, and other entities created or registered by filing a document with a secretary of state or similar state office, must report identifying information about beneficial owners to the Financial Crimes Enforcement Network (FinCEN) pursuant to the CTA. The CTA is designed to prevent “malign actors” from misusing legal entities to conceal their ownership of businesses in the United States or facilitating illicit activity such as money laundering, financing of terrorism, tax fraud, and other acts of foreign corruption that would harm the national security interests of the United States and its allies.
For existing reporting companies—that is, companies created before January 1, 2024—beneficial ownership information is due January 1, 2025. Existing reporting companies are not required to submit identifying information about company applicants, which is only required of reporting companies created or registered after January 1, 2024. Reporting companies created in 2024 must submit identifying information for beneficial owners and company applicants within 90 days after the entity is created. Reporting companies created on or after January 1, 2025, must submit identifying information for beneficial owners and company applicants within 30 days after creation.
Reporting companies must provide the full legal name, date of birth, and current address for all beneficial owners, as well as a unique identifying number such as a driver’s license or passport number3. A FinCEN identifier, “a unique identifying number issued to an individual or an entity by the Financial Crimes Enforcement Network (FinCEN),”4 is available for individuals or entities that provide the foregoing information directly to FinCEN5. Similar information must be reported for company applicants.6
Beneficial owners are individuals who exercise substantial control over a reporting company or own or control at least 25 percent of the ownership interest of a reporting company7. The Beneficial Ownership Information (BOI) Reporting Rule8 clarifies that an individual may directly or indirectly control an ownership interest in a reporting company through a trust by way of the individual’s position as (1) a trustee or other individual with the authority to dispose of trust assets, (2) a beneficiary who is the sole permissible recipient of both income and principal from the trust or has the right to demand a distribution or withdraw substantially all assets from the trust, or (3) a grantor that has retained the right to revoke the trust or otherwise withdraw the assets of the trust.9
Company applicants may include two types of individuals: (1) individuals who directly filed the document that created or registered a reporting company, or (2) individuals who are primarily responsible for directing or controlling the filing.10
FinCEN’s CTA filing website is now active and accepting company reports online11. The reporting obligations and risk of fines, penalties, and imprisonment imposed by the CTA will largely impact small businesses, as many larger entities are excluded from the definition of a reporting company. Attorneys who represent businesses or business-owning clients should review the CTA and related rules carefully to determine if the business is classified as a reporting company. Attorneys who help create companies may wish to review internal procedures and policies to determine whether they or law firm staff may count as company applicants subject to reporting requirements. In September 2023, FinCEN issued a Small Entity Compliance Guide12, but additional guidance continues to be issued, and, as evidenced by this recent case, the regulatory landscape continues to evolve. WealthCounsel continues to monitor developments related to the CTA and provide updates.
1 National Defense Authorization Act for Fiscal Year 2021, H.R. 6395, Pub. L. 116-283 (Jan. 1, 2021).
2 Beneficial Ownership Information Reporting Requirements, 31 C.F.R. pt. 1010 (2022).
3 Financial Crimes Enforcement Network, Beneficial Ownership Information Reporting: Frequently Asked Questions, F.1–E.11, https://www.fincen.gov/boi-faqs (last visited Mar. 4, 2024).
4 Financial Crimes Enforcement Network, FinCEN Identifier Application, Filing Instructions (Jan. 2024), https://fincenid.fincen.gov/assets/helpContent/FinCEN-ID-Instructions-20240101.pdf.
5 If an individual “is or may be a beneficial owner of a reporting company by an interest held by the individual in an entity that, directly or indirectly, holds an interest in the reporting company,” the reporting company may report the appropriate entity’s FinCEN identifier in lieu of providing the individual’s beneficial ownership information. 31 U.S.C. § 5336(b)(3)(C). A final rule issued in November 2023 identified three criteria that must be met for a reporting company to report an intermediate entity’s FinCEN identifier instead of information about an individual beneficial owner. See Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities, 31 C.F.R. pt. 1010 (2023), https://www.federalregister.gov/documents/2023/11/08/2023-24559/use-of-fincen-identifiers-for-reporting-beneficial-ownership-information-of-entities. FinCEN has launched a webpage for those interested in obtaining a FinCEN identification number. Financial Crimes Enforcement Network, Welcome to the FinCEN ID Application for Individuals, https://fincenid.fincen.gov/landing (last visited Feb. 19, 2023).
6 Financial Crimes Enforcement Network, Beneficial Ownership Information Reporting: Frequently Asked Questions, F.4 https://www.fincen.gov/boi-faqs#F_4 (last visited Mar. 4, 2024).
7 Beneficial Ownership Information Reporting Requirements, 31 C.F.R. pt. 1010 (2022).
8 Id.
9 Id.
10 Financial Crimes Enforcement Network, Beneficial Ownership Information Reporting: Frequently Asked Questions, E.1–E.7, https://www.fincen.gov/boi-faqs (last visited Mar. 4, 2024).
11 Financial Crimes Enforcement Network, File the Beneficial Ownership Information Report (BOIR), https://boiefiling.fincen.gov/fileboir (last visited Mar. 4, 2024).
12 Financial Crimes Enforcement Network, Small Entity Compliance Guide (Dec. 2023), https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf.
