The Biggest New Business Law You’ve Never Heard of Is Under Serious Threat

An update to the update! The Biggest New Business Law You’ve Never Heard of is Off Again, On Again, Off Again

Unless you want to monitor the blawgosphere daily (yes, it’s a thing we do), you may want to simply file your BOI report and just have it checked off your list, although as of this writing (December 27, 2024), penalties for the failure to file are not being enforced.

What Is the Corporate Transparency Act (CTA)?

What? You’re not following the dramatic twists and turns of the Corporate Transparency Act (CTA)? Don’t worry, you’re not alone if you’ve never heard of the CTA.

The CTA is a law that requires most small businesses to file a Beneficial Ownership Interest Report (BOIR) with the federal government, identifying a company’s “beneficial owners.” The law requires most companies formed after January 1, 2024, to file within 90 days of formation. For small businesses formed before then, the deadline to file the BOIR is December 31, 2024.

The BOIR is filed with FinCEN, the federal agency responsible for preventing and investigating financial crimes.  Click to read more on the CTA. They have been trying to get the word out, but surveys and feedback from our customers indicate awareness, despite our best efforts and even FinCEN advertisements on NPR, is low. Failing to file the BOIR has some dire consequences including fines of up to $500 per day.

Why Is There This New Filing Requirement?

The main purpose of the CTA is in its name: transparency.

Pros

• Enhanced transparency: The CTA aims to combat financial crimes involving shell or specious entities by requiring businesses to disclose beneficial ownership information.

• Information sharing: Facilitates collaboration among federal agencies to prevent money laundering.

• One-time filing: For most entities, the BOIR is a one-time filing unless ownership or control changes.

• Non-public disclosure: Filing information is not open to the public, maintaining a degree of privacy.

• Exemptions: Large entities with more than 20 full-time employees and gross receipts of $5 million or more, along with 22 other types of entities, are exempt from reporting.

Cons

• Burden on small businesses: Many small businesses must comply with the reporting requirements, with costs ranging from $85 to $2,615 for the initial report and $38 to $561 for updates.

• Complex reporting process: Defining “beneficial ownership” can be complex and may require detailed analysis.

• Sensitive data: The BOIR requires personal information, such as birth dates, addresses, and identification documents.

• Tight deadlines: New entities formed after January 1, 2024, must file within 90 days; those formed after January 1, 2025, have only 30 days.

• Harsh penalties: Noncompliance can result in fines of up to $500/day (up to $10,000) or imprisonment for up to two years.

• Ongoing monitoring: Changes to beneficial ownership or company information must be reported within 30 days.

What’s Going On in the Courts?

FinCEN has won more challenges to the CTA than it has lost. But, it just takes one loss to crater it. In preliminary rulings, some courts have ruled it is constitutional, but a couple have ruled that it’s not and enjoined enforcement. While there are several legal arguments involved, the most contentious ones center on whether or not Congress has the power under the Interstate Commerce or the Necessary Proper clauses of the Constitution to place this new requirement on new businesses. The reasons for each outcome are summarized below.  

Key Constitutional Arguments

Constitutional:

• When considered in the broader context of preventing money laundering, the CTA falls within Congress’s constitutional authority to regulate “Interstate Commerce.” Congress is authorized to regulate financial crimes and foreign commerce. The CTA targets businesses that have a substantial effect on interstate and foreign commerce. 

• Congress has the authority to regulate national security, foreign affairs, and to lay and collect taxes. The CTA is “necessary and proper” so Congress can do that.

Unconstitutional:

• Simply forming an entity at the state level (regardless of whether it engages in activity) is not “Interstate Commerce” and therefore Congress cannot regulate it. Not requiring some commerce would impermissibly expand Congress’s power.

• The act of forming an entity which triggers the BOIR requirement is a state activity adding further support that this is not an area Congress has the authority to regulate under the Constitution.

• Allowing Congress to regulate the mere existence of an entity would equate to unlimited regulatory and policing authority for Congress.

A Historical Example: Interstate Commerce

The courts’ interpretation of “Interstate Commerce” has ebbed and flowed, but it is likely broader than you think. For example, in 1942, the Supreme Court held that Congress could prohibit a farmer from growing wheat for his personal consumption and not otherwise sold to anyone else. The court ruled even if the wheat farmer’s activity was locally not regarded as commerce, it may still be regulated by Congress if the activity “exerts a substantial economic effect on interstate commerce.” In other words, Congress had the right to regulate the larger market for wheat, so they had the right to regulate the individual farmer’s own consumption even if it would only have a “trivial” impact on the market. If others copied the farmer, the impact would no longer be trivial on the larger wheat market. 

When applying these and other Interstate Commerce rules to the CTA, the outcome seems to be focused on how broadly courts interpret what the CTA actually is. The courts that leave it in place usually note that it is part of a much broader effort by Congress to address money laundering and national security. Under that view, Congress can regulate it. The courts who have found it unconstitutional look at it simply as addressing the very discrete requirement for companies created at the state level to file a new federalism form. Under that view, it is not covered by even the broad interpretation of Interstate Commerce.

Importantly, these are preliminary decisions that are being appealed.  The 11th Court of Appeals (Atlanta)  held oral argument on September 27, 2024, on a prior ruling. The government has already appealed last week’s decision  

What Should You Do?

Although enforcement is paused for now, this is a preliminary injunction that can be stayed. modified, or overturned by an appellate court. If that happens, the reporting deadlines and the December 31 deadline could catch you by surprise. FinCEN is still accepting filings. You should consider checking this off your list and do it yourself or use Swyft Filings. Otherwise, you may have to keep up with the blawgosphere (yes, that is a thing) and nerd out on more wheat cases, so you are ready to move quickly based on what happens on appeal.