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

The TLDR version - 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.

In early December, a U.S. District Court in Texas ruled the Corporate Transparency Act, which requires almost 33 million business owners to file a Beneficial Ownership Interest Report is unconstitutional and therefore prevented FinCEN from enforcing the law. On December 23, 2024, a three-judge panel of the Fifth Circuit lifted that stay meaning enforcement was is back and the clock wasticking with new deadlines. Then, on December 26, the entire Fifth Circuit reversed that three-judge panel and put the injunction prohitbing FinCEN from enforcing it back on. Read more for more on why the CTA was passed, a quick comparison of the various court rulings,  and what you should do now.

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

It is a law that requires most small businesses to file a Beneficial Owner Interest Report (“BOIR”) with the federal government that identifies a company’s “Beneficial Owners.”  The law requires most companies formed after January 1, 2024, to file within 90 days of when they are formed. That deadline was scheduled to be shortened to 30 days for companies formed after January 1, 2025. For small businesses formed before 2024then, the deadline to file the BOIR is December 31, 2024.

The BOIR is filed with FinCEN, the federal agency in charge of preventing and investigating financial crimes. 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 the name – transparency. 

Pros

1. Enhanced transparency: The CTA aims to combat financial crimes through shell or specious entities by requiring businesses to disclose beneficial ownership information that identifies individuals involved.

2. It facilitates information sharing amongst federal agencies to prevent money laundering

3. One-time filing: For most entities, the beneficial ownership disclosure is a one-time filing, unless ownership or control changes.

4. Non-public disclosure: The filing information is not open to the public, maintaining some level of privacy.

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

Cons

1. Burden on small businesses: Many small businesses will not meet the exemption criteria and must comply with the reporting requirements. FinCEN estimates it would cost approximately $85.14 - $2,614.87 to prepare and submit an initial report and approximately $37.84–$560.81 for entities to file updated BOI reports.

2. Complex reporting process: The definition of "beneficial ownership" is complex and may require a detailed analysis of an entity's ownership structure. 

3. The BOIR includes personal information such as dates of birth and addresses, and requires uploading of identifying documents.

4. Tight deadlines: New entities formed after January 1, 2024, must disclose beneficial ownership within 90 days of formation, and those formed after January 1, 2025, have only 30 days.

5. Harsh penalties: Noncompliance carries significant penalties, including civil fines of up to $500 per day (up to $10,000) and/or imprisonment for up to two years.

6. Ongoing monitoring: if there is a change to the company or any of its Beneficial Owners, you must file an update within 30 days of the change.

So, 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.  

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.

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 local 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.

When the Fifth Circuit three-judge panel lifted the stay and put enforcement back on the table, the appellate court indicated the government will likely win when they take the matter up with full briefing writing:

Then, the plaintiffs asked the entire Fifth Circuit to reconsider and that is how the injunction prohibting enforcement got put back in place. The order doing that says:

In short, enforcement is now prohibited again and the filing is back to being voluntary.

So, what should I do?

Although filing was voluntary, you should do it because the appellate courts could act quickly causing the timeline to re-appear. You can check this off the list and stop worrying about the whiplash by filing your ou file your BOIR and be done with it by filing it yourself or use Swyft Filings.