Most people are aware that forming a business entity protects them personally from liability in some fashion. Founding a corporation or a limited liability company (LLC) can also provide a measure of privacy for individuals who do not want personally identifiable information readily available on state databases. Importantly, however, does not mean a business can ignore the myriad laws and regulations imposed by Federal, State, and Local governments. Some of these laws and regulations prohibit certain conduct, whereas others require affirmative compliance measures to be taken. Failure to comply can subject a business to penalties, fees, or expose the business to lawsuits. One of the more recent laws that has been added to this minefield is the “Corporate Transparency Act.”
How do entities like Corporations and LLCs provide privacy?
As Congress noted, “most or all States do not require information about the beneficial owners of the corporations, limited liability companies, or other similar entities formed under the laws of the State.”[1] Indeed, it is theoretically possible to comply with the requirements of forming a corporation or an LLC in Washington or Idaho without ever providing your personal mailing address or banking information. Nesting one corporation or LLC inside another—like Russian nesting ‘Matryoshka’ dolls—can further reduce public visibility.
While many ordinary citizens may desire this privacy, it has also been abused by more nefarious actors “to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States.”[2]
What is the Corporate Transparency Act?
In 2021, Congress adopted the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021.[3] Contained within the 1,482 page law—which mostly provides the Congressional authorization for the Department of Defense, COVID-19 response funding, and the Coast Guard’s operations—is Division F, the Corporate Transparency Act (the “CTA”). For those readers wondering how something which sounds so unmilitary wound up in a defense bill, Congress spells out the connection:
The CTA was adopted to provide the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) with a database of “beneficial owners” to create a nonpublic database of beneficial owners of corporations, LLCs, and similar entities.[4] This tool would allow FinCEN to trace the flow of illicit funds through corporate structures to combat money laundering and financing of terrorism.[5]
As no database of this information exists, the CTA required all reporting entities to submit a report to FinCEN listing its beneficial owners—that is a person who “exercises substantial control over the entity” or who “owns or controls not less than 25 percent of the ownership interests of the entity.”[6] Other than specifically exempted entities, an entity which operates within the United States and has less than 20 full-time employees or less than $5,000,000 in gross receipts or sales is required to submit a report. [7]
Under the CTA, a company formed prior to January 1, 2024 was obligated to file a Beneficial Ownership Information (“BOI”) report prior to January 1, 2025. Any company formed after January 1, 2025 but prior to January 1, 2025, would have 90 days from its formation to file a BOI report. Any company formed after January 1, 2025 would have to file a BOI report within 30 days.[8]
The CTA also requires updated reports when certain changes occur, such as (a) a change in the information for the reporting company, such as a new business name; (b) changes in beneficial owners (i.e. new CEO, or sale of 25% of the company); or (c) changes to any beneficial owner’s name, address, or FinCEN issued number.
Failure to comply with the reporting requirements can result in hefty penalties and fees.
Does my business have to comply with the Corporate Transparency Act?
Currently, no. Although the law took effect on January 1, 2024, the constitutionality of the law has been challenged in several federal courts. Although some district courts around the country found the law constitutional,[9] the District Court for the Eastern District of Texas issued a nationwide, temporary injunction—finding the law was “likely unconstitutional as outside of Congress’s power.”[10]
Is this injunction permanent? (And what is an injunction?)
As you might have guessed, a “temporary injunction” is not permanent. It is a procedural mechanism that permits a plaintiff to request the Court enter an order to prevent another party from taking an action prior to the case being fully presented because of the potential damages that would occur if the action was allowed to take place while the case moves through litigation. Temporary
injunctions require a court to find “a likelihood of success on the merits”—so they can serve as possible indicator of how a court will eventually rule, but the court is not bound to come to the same conclusion at the end of a full trial.
Additionally, the Department of Justice, on behalf of the Department of the Treasury, has filed a notice of appeal in the case, asking the U.S. Court of Appeals for the Fifth Circuit to remove the injunction. Accordingly, for the time being, your business is not totally free and clear from reporting requirements under the CTA.
In the interim, FinCEN has provided guidance that companies may voluntarily submit the report, although failure to do so will not result in penalties or fines while the injunction is in effect. It is unclear how long companies will have to file the report should the temporary injunction be removed. Therefore, it is advisable to have the information for the reports readily available. If you desire assistance in compiling that data, we are available to help.
While this informational publication is about legal issues, it is not legal advice. Legal information is not the same as legal advice and is not a sufficient substitute for or replace the advice or representation of a licensed attorney. If you desire an interpretation of any of the legal principles addressed herein, we recommend you consult with a licensed attorney.
Paine Hamblen, P.S. is a full-service law firm, based in Spokane, Washington, and can assist you with choosing the right business structure, complying with applicable laws and regulations, drafting and reviewing contracts, mitigating risks and liabilities, and navigating the complexities of employment and labor laws. For assistance with a particular business challenge you may be facing, call us at 509-455-6000.
[1] Act Jan. 1, 2021, P.L. 116-283, Div F, Title LXIV, § 6402(2).
[2] Act Jan. 1, 2021, P.L. 116-283, Div F, Title LXIV, § 6402(3)
[3] See 116 P.L. 283.
[4] Act Jan. 1, 2021, P.L. 116-283, Div F, Title LXIV, § 6402(6)
[5] Act Jan. 1, 2021, P.L. 116-283, Div F, Title LXIV, § 6402(3-4)
[6] 31 USC 5336(a)(3)(A).
[7] 31 USC 5336(a)(11)(B)(xix).
[8] FAQs: Beneficial Ownership Information | FinCEN.gov
[9] See Beneficial Ownership Information Reporting | FinCEN.gov.
[10] Tex. Top Cop Shop, Inc. v. Garland, Civil Action No. 4:24-CV-478, 2024 U.S. Dist. LEXIS 218294, at *115 (E.D. Tex. Dec. 3, 2024)
