As previously discussed by our firm in prior newsletters, Congress, in 2021, passed the Corporate Transparency Act (the Act) requiring reporting companies to provide certain company and beneficial ownership information to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), unless such entity falls within one of the 23 types of entities that are exempt from the reporting requirements. In simple terms, a reporting company is a corporation, limited liability company or other entity created by filing a document with a state agency and a beneficial owner includes individuals who, directly or indirectly, exercise substantial control over the reporting company or own or control at least 25% of the ownership interests of such company.

The Act went into effect on January 1, 2024. From early experience, we have learned that, for most entities, the filing is relatively simple and straightforward. For others, where there are multiple beneficial owners, trusts or other entities as owners, the filing is more cumbersome.

The newest wrinkle comes from a successful challenge to the constitutionality of the Act. On March 1, 2024, a federal district court in Alabama ruled the Act to be unconstitutional (National Small Business United et al. v. Yellen et al., No. 5:22-cv-01448, Dkt. 51 (N.D. Ala. 2024). In a lengthy opinion, the court ruled that Congress exceeded its powers in passing the Act.

The government has appealed the ruling. In addition, the government was quick to announce that FinCEN will continue to enforce the Act, except as to those individuals and entities that are plaintiffs in that Alabama case cited above.

We will continue to monitor the status of the Act and will track the appeal of that case in the Eleventh Circuit and the progress of pending lawsuits in other jurisdictions. We anticipate the government may want that appeal heard on an expedited basis. With multiple lawsuits and jurisdictions involved, it may be years before we have a definitive answer on the constitutionality of the Act.

Until then, we urge entities to comply with the Act, which, generally speaking, requires filing prior to January 1, 2025 for existing entities formed before January 1, 2024 and within 90 days of formation, if formed in 2024. The failure to comply may result in a $500 per day (up to $10,000) civil penalty and possible criminal penalties i.e., up to two years in jail.

In addition to the uncertainty triggered by that Alabama case, we still do not know how Congress will monitor the approximate millions of FinCEN filings that are anticipated to occur in 2024, the estimated five million anticipated annual filings in each year thereafter and the extent to which Congress will enforce the penalties mentioned above. For now, filing is the best course of action.