Update as of December 4, 2024: The U.S. District Court for the Eastern District of Texas has suspended the implementation of the Corporate Transparency Act’s (CTA) Beneficial Ownership Information (BOI) reporting requirements. Read more here: U.S. District Court Suspends Implementation of BOI Reporting Requirements.

A federal district court has ruled that the Corporate Transparency Act (CTA) is unconstitutional. What does this judgment mean for BOI (Beneficial Ownership Information) reporting? Who is affected? Let’s dive in.

Background

Check out our blog, Corporate Transparency Act Introduces BOI Reporting Requirements for the details, but most existing and new U.S. corporate entities are required to file reports with the federal government (starting January 1, 2024) regarding their beneficial owners. The CTA is part of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) efforts to combat illicit financial activity and money laundering practices.

Who is considered a beneficial owner of a reporting company?

This is any individual who, directly or indirectly:

• Exercises substantial control (the “Substantial Control Test”) over the company or

• Owns or controls at least 25% of the company’s ownership interests.

What is the new ruling?

In 2021 a small business advocacy group, The National Small Business Association (NSBA) filed a lawsuit against the U.S. Treasury Department, citing the CTA as unconstitutional. The NSBA argued that the CTA violates the Constitution by encroaching on the rights of due process, privacy and state sovereignty.

On March 1, 2024, Alabama Federal Judge Liles C. Burke ruled the CTA unconstitutional, siding with the NSBA.

What does this new ruling mean for BOI reporting?

Does this ruling mean that the Treasury and other federal government agencies are prohibited from enforcing the CTA and BOI reporting?

Well, not exactly.

Rather, the CTA cannot be enforced on the plaintiffs in the suit - National Small Business Association (NSBA) or its members. Those plaintiffs are not required to report BOI information to FinCEN.

FinCEN estimates that no more than 40,000 small businesses will be impacted by the ruling. Approximately 30 million small businesses (non-NSBA members) will still be required to report on their beneficial owners.

Are more changes on the horizon?

It is likely the US Department of the Treasury will appeal the ruling, but that could take some time. It is also possible that Congress will review the BOI rules now that filings have begun and business owners are more loudly voicing their concerns.

However, for now, unless an exception applies or you are a member of NSBA, every entity that is organized under the laws of a state or the federal government (i.e., corporations, LLCs, many partnerships, etc.) is required to report to FINCEN certain information about the entity’s beneficial owners.

What action should you take now, if any?

Because the BOI reporting is a matter of legal compliance, KLR cannot make the filing on behalf of our clients. We encourage our clients to review our summary of the BOI reporting rules and the information provided at the FINCEN FAQ page. If you determine that you have a filing requirement and understand the information you are required to provide, you can make the filing directly to FINCEN by using the FINCEN e-filing system.

If you need assistance to determine whether you have a BOI reporting requirement, we advise you to work with your attorney to make that determination and assist with the legal filing. There are also a number of corporate compliance service companies that can assist with the filing, for a reasonable fee.

Questions? We can point you in the right direction. Contact us.