Understanding the Corporate Transparency Act (CTA) for Executives

The Corporate Transparency Act (CTA) mandates that many businesses report beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN). This requirement is codified in 31 USC § 5336 and is crucial for CEOs, CFOs, and other executives to understand.

Reporting Company Obligations:

• Any "Reporting Company" must report specific BOI to FinCEN. For companies formed after January 1, 2024, this includes information on both the "Applicant" and Beneficial Owners.
• The required information includes each Applicant and Beneficial Owner’s full name, date of birth, address (business or residential), and an identifying number from a document such as a driver’s license or passport.

Definition of a Reporting Company:

• A Reporting Company is defined as any “corporation, limited liability company, or other similar entity that is: (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the laws of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe…” This text includes both foreign and domestic entities.
• Exceptions include highly regulated entities such as governmental entities, banks, credit unions, insurance companies, and public utilities. Additionally, entities with over 20 employees in the U.S. and more than $5 million in gross receipts, or those that have been inactive for over a year and are not owned by a foreign person, are also exempt.

Who is an Applicant?

An Applicant is:

• Any individual who files an application to form a corporation, LLC, or similar entity under state or tribal law.
• Any individual who registers or files an application to register a foreign entity to do business in the U.S. by filing with the secretary of state or similar office under the laws of a State or Indian Tribe.

According to FinCEN FAQs, there can be up to two Applicants for each Reporting Company: the individual who directly files the formation document and the person primarily responsible for directing or controlling the filing.

Who is a Beneficial Owner?

A Beneficial Owner is:

• An individual who exercises substantial control over the entity or owns/controls at least 25% of the ownership interests.
• Employees acting solely in their capacity as employees are not considered Beneficial Owners.
• Lawyers providing general legal services and counseling are also typically not considered Beneficial Owners unless they have substantial control over decision-making.

Reporting and Penalties

• All reported information must be updated within one year of any changes.
• Penalties for willfully providing false BOI or failing to report complete or updated BOI can include fines up to $10,000 or imprisonment for up to two years. There is a safe harbor clause if inaccurate information is corrected within 90 days.

Legal Challenges and Current Status

• The CTA was first challenged by National Small Businesses United (known as the National Small Business Association or NSBA) in the United States District Court for the Northern District of Alabama. The Court issued an injunction that applied only to the NSBA plaintiffs, which is still in effect.
• The next major legal challenge was in the Eastern District of Texas in Texas Top Cop Shop Inc. v. Garland. In this case, the Court held that the CTA was unconstitutional and issued a nationwide injunction. This nationwide injunction was overruled by the Fifth Circuit on December 23, 2024, but 3 days later, a merits panel of the Fifth Circuit vacated the stay and reinstated the nationwide injunction. The Supreme Court ultimately stayed this injunction.
• However, on January 7, 2025, another Texas District Court issued a nationwide injunction in Smith v. United States Department of the Treasury. This injunction remains in effect.
• As of March 26, 2025, the Treasury Department, under Secretary Scott Bessent, announced the suspension of CTA enforcement for domestic entities, focusing only on foreign owners of foreign Reporting Companies. This suspension is discretionary and could be reversed by future administrations.

Understanding these requirements and staying compliant with the CTA is essential for executives to avoid significant penalties and ensure their businesses operate within the legal framework. For further guidance, consulting with legal professionals specializing in corporate law is recommended.

About the Author:

Lewis W. Ostermeyer is a business and transactional attorney with the Business Law team at Barrett McNagny. He can be reached at lwo@barrettlaw.com or at 260.423.8856.