The rules and guidelines of the Corporate Transparency Act, a federal law passed as part of the Anti-Money Laundering Act of 2020 (AML Act Title LXIV (Sections 6401-6403)), have been published and will take effect on January 1, 2024. The new regulations create reporting obligations for many small businesses operating in the United States. They increase the amount of corporate information accessible by the federal government and establish steep penalties for noncompliance.
The Corporate Transparency Act requires the disclosure of corporate entity ownership, specifically beneficial ownership information (BOI). According to the September 2022 update to the Federal Register, “Congress recognized that the lack of a centralized BOI reporting requirement in the United States constitutes a weak link in the integrity of the global financial system” (Federal Register / Vol. 87, No. 189). The stated purpose that led to the new statutory requirements found in 31 U.S. Code § 5336 is to prevent concealed ownership of entities, which is commonly accomplished through the construction of shell corporations. These might be formed to conduct illegal activities, such as terrorism, money laundering, human smuggling, drug and arms trafficking, tax evasion, and crimes by those prohibited from doing business in the U.S.
Few states have registration requirements that require corporate entities to inform regulators about the parties benefiting from their business. By requiring domestic and foreign entities that have otherwise been immune from this type of regulation to now share beneficial ownership information with the Financial Crimes Enforcement Network of the United States Department of the Treasury (FinCEN), Congress aims to create a database for federal investigators. The information disclosed in the BOI report may lawfully be accessed by law enforcement agencies and financial institutions.
Pursuant to the new regulations added to 31 CFR § 1010.380, beginning on and after January 1, 2024, newly formed entities in all jurisdictions that are required to register with a state office under state law, must file an initial report within thirty days of formation, unless exempted. The form will be filed electronically on FinCEN’s website, and must disclose information about the entity, the individuals filing the form, and the business’s beneficial owners. Beneficial owners of an entity are generally considered individuals who “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—(i) exercise[s] substantial control over the entity; or (ii) own[s] or control[s] not less than 25 percent of the ownership interests of the entity” (31 U.S. Code § 5336). The required information includes business registration information and personal identification information and is supported by providing acceptable documentation, including non-expired photo identification. Existing entities formed before January 1, 2024, have until January 1, 2025, to file the initial report. Updates must be continually reported with respect to business ownership information.
There are twenty-three categories of entities exempted from the reporting requirements, including: (i) those in certain regulated industries, and (ii) certain large businesses, such as, for example, some businesses that operate with more than twenty full-time employees, have a physical office presence in the United States, and demonstrate a revenue of more than $5,000,000 on federal tax returns. These exempted entities are considered to be already regulated under other areas of law. Aside from these exemptions, most active small corporations and limited liability companies, including many healthcare companies and those created for transactional structuring needs such as holding companies and real estate investment companies, may be bound by the new BOI reporting requirements. While there is no fee for filing the BOI report, penalties for willfully failing to file or for providing false information include steep fines and imprisonment.
In opposition, the new BOI reporting requirement was challenged last year by the National Small Business Association (NSBA) on constitutional grounds. A complaint filed in November 2022 claimed that the law infringes on state law powers, violates freedoms of speech and privacy, exceeds authority over interstate commerce, is vague, and does not serve the purpose of regulating commercial activity (National Small Business United et al v. Yellen et al). The Department of the Treasury maintained that the Corporate Transparency Act is authorized under the Foreign Affairs and National Security Powers, the Necessary and Proper Clause, the Interstate Commerce Clause, the Foreign Commerce Clause, and the Government’s Taxing Authority, and that it does not violate the Tenth Amendment. The case is still pending in litigation.
Our Firm is committed to assist our clients in complying with these new reporting requirements.
Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a New York law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.
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