Court rulings provide guidance on the application of laws. This guidance can range from a need to make relatively minor adjustments in practices to remain in compliance with applicable rules and regulations to a major overhaul. The United States District Court of the Northern District of Alabama provided a recent example of a complete overhaul when it ruled the Corporate Transparency Act (CTA) unconstitutional. The court went on to reason that the CTA exceeds the limits on the legislative branch as spelled out within the Constitution and does not have the needed nexus to pass the necessary and proper test.
Step Back: What is the CTA?
If you operate a business and have not heard of the CTA, you are not alone. The Corporate Transparency Act is a federal law that represents a significant shift in the legal landscape for businesses in the United States. Passed in January 2021 as part of the National Defense Authorization Act, lawmakers intend the law to uncover the beneficial owners of anonymous entities to prevent illicit activities. The CTA requires that certain companies disclose their beneficial owners to the Financial Crimes and Enforcement Network (FinCEN) — and yet many business owners have never heard of it.
Entities affected by the CTA include corporations, LLCs, and similar entities formed through state filings, as well as foreign entities registered to operate in the United States.
While exceptions are in place for specific circumstances—such as publicly traded companies, certain regulated entities, and companies with substantial U.S. presence, significant revenue, and workforce—compliance is the government’s expectation, whether you’re familiar with the law or not.
The consequences of non-compliance are severe. Entities that fail to comply, or knowingly provide false information, face stiff penalties that can include $500 per day and can increase to $10,000 per violation. But the financial penalty is only part of the package. Those found in violation also face up to two years of jail time.
Should My Business Worry About Compliance?
Although the court agreed to an injunction against implementation of the CTA and FinCEN reporting requirements, the injunction only applies to the plaintiffs named in the case. As a result, at this time it is generally still wise for businesses to adapt to the CTA and take necessary steps to better ensure compliance to avoid legal repercussions. This includes:
- Identification of beneficial owners, and
- Preparation and submission of annual filings with accurate ownership information.
Need Help With Corporate Transparency Act Compliance?
Entities should conduct a thorough review of their structures and seek legal counsel to assess their practices, ensuring full compliance with the CTA’s requirements. As developments in this law unfold, we are committed to keeping you informed.