There has been much written about the federal Corporate Transparency Act (CTA) and the lawsuits surrounding it, along with the New York State equivalent statute, the New York LLC Transparency Act (NYLTA). The landscape of the CTA is shifting fast and the following is to give you an overview of the current status of these new statutes.
The Federal Statute
The Corporate Transparency Act was signed into law on January 1, 2021. The purpose of the statute is to reduce money laundering and other illegal activities. The statute directs that beginning January 1, 2024, non-exempt businesses are required to report certain information regarding their ownership to Financial Crimes Enforcement Network (FinCEN), which is a bureau of the United States Department of the Treasury.
Who files?
Domestic and foreign companies are required to file with FinCEN if they are deemed a reporting company. In general terms, a reporting company is an entity that was formed through a filing with a Secretary of State or similar office. Therefore, the statute is applicable to corporations, LLC’s, limited partnerships and any other entities that are formed through Secretary of State filings. Sole proprietorships, certain trusts and general partnerships are not considered reporting companies. Also, an entity is not deemed to be a reporting company (and need not file any information with FinCEN) if such entity falls within any one of 23 exemptions. These exemptions cover many accounting firms and financial institutions, inactive entities and, importantly, 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 its prior year).
What is reported?
Beneficial ownership information (BOI) must be reported for the reporting companies. The BOI information includes the individual’s full legal name, date of birth, street address and a unique ID number. The unique ID number can be from a non expired US passport or state driver’s license or other government issued identification card.
Who is an owner?
In broad terms, there are two groups of individuals who are considered beneficial owners of a reporting company. First, any individual who directly or indirectly owns or controls at least 25% of the ownership interest of the reporting company or, second, any individual who exercises substantial control over the reporting company. Individuals with substantial control are those with substantial influence over important company decisions regarding the business.
When must filing be done?
For entities formed on or after January 1, 2024 and on or prior to December 31, 2024, the FinCEN initial filing must be done within 90 days after the formation of the entity. For entities formed on or after January 1, 2025, the initial filing must be done with 30 days after the formation of the entity. For entities already in existence on January 1, 2024, the reporting deadline is January 1, 2025.
How often must the filing be done?
The reporting requirement is not limited to an initial filing. The CTA provides that any changes to the reported ownership information must be reported within 30 days of that change.
What happens if filings are not made?
The penalties for non-compliance can be severe. Failure to file both the 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 time.
The most recent legal challenge
On March 1, 2024, the US District Court for the Northern District of Alabama declared the Corporate Transparency Act unconstitutional and suspended its enforcements against members of the National Small Business Association (who are the plaintiffs in the applicable case). The aforementioned court found the that the CTA exceeds constitutional limits of Congressional powers. This decision is now being appealed. This case is most likely the first of many similar cases and the matter will most likely end up at the US Supreme Court. As the March 1 decision only applies to the plaintiffs in such case, the CTA statute continues to apply to all other entities.
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.
Conclusion
We will be sending our clients and friends additional updates and reminders regarding the CTA and the NYLTA. If you have any questions regarding the CTA or the NYLTA, please contact James Nicoll at jnicoll@mackenziehughes.com or 315-233-8244.