This is a follow up to our April post regarding the Corporate Transparency Act (CTA), the New York State equivalent statute, the New York LLC Transparency Act (NYLTA) and the new guidance issued by regulatory authorities governing these statutes. As previously noted, the landscape surrounding these statutes remain in-flux and this update is intended to provide you with the most recent guidance to date.
Background Overview – Federal Statute
The CTA was signed into law on January 1, 2021 and directs that beginning January 1, 2024, non-exempt businesses are required to report certain information regarding their ownership to the Financial Crimes Enforcement Network (FinCEN), a regulatory arm of the United States Department of the Treasury.
Domestic and foreign companies are required to file with FinCEN if they are deemed a reporting company. Generally, a reporting company is an entity that was formed through a filing with the Secretary of State or similar governmental entity. This makes the statute applicable to corporations, LLC’s, and limited partnerships alike. Notably, an entity can qualify for one of the 23 exemptions in the statute which would deem it not to be a reporting company and thus exempting it from registration requirements with FinCEN. These exemptions are broad and guidance is still forthcoming, but they cover accounting firms, financial institutions, and large operating companies (defined as any entity having more than 20 full-time US employees, a physical presence in the US, and more than $5 million of US-sourced gross receipts in the prior year).
Reporting companies must report beneficial ownership information (BOI) to FinCEN. BOI information includes an individual’s full legal name, date of birth, street address and an unique ID number. Owners who are required to report this information generally fall into two groups. First, any individual who directly or indirectly controls 25% of the ownership interest of a reporting company and second, any individual who exercises substantial control over the reporting company. An individual can have substantial control over a reporting company if they have substantial influence over important company decisions.
For entities formed after January 1, 2024 and on or prior to December 31, 2024, the initial FinCEN filing must be done 90 days after the formation of the entity. For entities in existence prior to January 1, 2024 the reporting deadline is December 31, 2024. All entities formed after January 1, 2025 the initial filing period is shortened to 30 days after the formation of the entity.
The filing requirement is ongoing, meaning that any changes to the reported ownership information must be reported to FinCEN within 30 days of that change. Non-compliance penalties can be severe, as failure to file initial and/or updated reports can result in civil fines of $591 per day up to $10,000 and criminal penalties of up to two years of prison.
Recent FinCEN Guidance
On Monday July 8, 2024, FinCEN released additional guidance regarding reporting companies under the CTA, as it further seeks to clarify outstanding issues for entities and beneficial owners subject to this statute. Most notably, FinCEN clarified that reporting companies that exist or are created on or after January 1, 2024, are still required to make beneficial ownership filings even if the company is dissolved or otherwise ceases to exist prior to the due date of their initial filing under the CTA. The same reporting schedule listed above applies for reporting companies falling under the CTA in 2024 and 2025 going forward. This guidance does not apply to reporting companies who are dissolved or otherwise cease to exist prior to January 1, 2024, as they have no ongoing reporting requirements under the CTA. A company only ceases to exist as a legal entity if it entirely completed the process of formally and irrevocably dissolving. Applicable state law of the jurisdiction in which the company was created or registered governs whether a company has completed the process of formally and irrevocably dissolving.
The most practical application of this guidance shows us that if a reporting company legally existed in 2024 (whether existing prior to 2024 or formed in 2024), then absent an exemption to the reporting requirements, they are obligated to make a BOI filing under the CTA by their applicable filing date; regardless of whether the company continues to exist. Per the FinCEN guidance, if an initial CTA filing is made and then the reporting company subsequently ceases to exist, there is no explicit requirement that FinCEN be notified of such event. However, it is unclear at this time to what extent ongoing reporting requirements exist to change or update BOI information when a reporting company is in the process of dissolving.
Legal Challenge to the CTA
As previously noted, the US District Court for the Northern District of Alabama declared the CTA unconstitutional and suspended enforcement against the plaintiffs in that case, who were members of the National Small Business Association. This decision is in the process of being appealed and we expect to see similar cases arising out of district courts until the constitutionality of the law is decided by appellate courts or ultimately the US Supreme Court.
The New York LLC Transparency Law
The New York LLC Transparency Act (NYLTA) was enacted on December 22, 2023. The NYLTA will require LLC’s formed under New York State law or qualified to conduct business in New York State to file ownership information with the State. For LLC’s that were formed or qualified on or after January 1, 2026, the effective date of NYLTA is January 1, 2026. For LLC’s that were formed or qualified prior to January 1, 2026, the deadline for initial filings under the NYLTA is January 1, 2027. The NYLTA used most of the same definitions as the CTA but for the limitation of applicability solely to LLCs. Since much of the New York law tracks the CTA, we expect similar guidance from New York regulators in the future.
Conclusion
We feel that these are important issues to raise for clients trying to understand and remain compliant within the CTA reporting structure. It will also impact issues in transactional matters, such as mergers and acquisitions of reporting companies that take place in 2024, along with considerations for ongoing compliance of new entities formed by these transactions. Despite this clarifying guidance, there still exists considerable compliance challenges with these new reporting requirements. All non-exempt reporting companies in existence in 2024 now have any obligation to file, even though the deadline for filing BOI information has not been reached. We will continue to send additional updates and remainders to our clients and friends but want to note that the December 31, 2024 deadline is rapidly approaching. Please contact James Nicoll at jnicoll@mackenziehughes.com (315-233-8244) or Robb Barrett at rbarrett@mackenziehughes.com (315-233-8304) for assistance.
Written by Robb Barrett and James Nicoll.