Most U.S.-based business entities are now required by a federal statute to report their “beneficial ownership information” (BOI) to an agency known as “FinCEN,” the Financial Crimes Enforcement Network.[i] BOI reporting is required by the 2021 Corporate Transparency Act (the “CTA”) and applies to all companies that qualify as “reporting companies” under CTA,[ii] including foreign entities registered to do business in any location in the United States.[iii]

However, the U.S. District Court in the Eastern District of Texas issued a nationwide preliminary injunction this December that prohibits enforcement of the CTA.[iv] After initially being vacated by a 5^th Circuit panel, a separate 5^th Circuit panel recently upheld the injunction.[v] Pending resolution of an expedited appeal sought by the United States, compliance with the CTA is currently not required by law.

Purpose of the CTA

The CTA is reportedly intended to combat the use of business entities to shield the identity of criminal actors in money laundering and other unlawful activities. For that purpose, the CTA requires entities that qualify as “reporting companies” to disclose in “BOI Reports” the identities of their “beneficial owners,” meaning each person (a) who owns or controls at least 25% of the entity’s ownership interests or (b) who substantially controls the entity.

What are the Relevant Filing Deadlines?

The CTA specifies three separate deadlines depending on facts relevant to the specific reporting company:

• Companies formed prior to 2024. By January 1, 2025, reporting companies that existed prior to 2024 are required by the CTA to have filed their BOI Reports. But because of recent litigation, FinCEN granted an extension to January 13, 2025, and has more recently recognized the effectiveness of the order enjoining the government from enforcement the CTA.[vi]
• Companies formed during 2024. Any reporting company formed during 2024 is required to file or to have filed its BOI Report within 90 calendar days after notice that the entity’s creation or registration is effective. Accordingly, if you own an entity formed during 2024 and the entity has not reported its BOI, your company may not be compliant with the statute and may wish to consider taking prompt action to comply.
• Companies formed after January 1, 2025. New entities that qualify as reporting companies are required to file their BOI report within 30 days of creation or registration.

Consequently, if the CTA is ultimately determined to be constitutional by federal courts of appeals, the filing of BOI Reports will become a standard activity required in connection with the formation of business entities and ongoing CTA review will be necessary to ensure regulatory compliance. That said, FinCEN cannot currently enforce the CTA due to the preliminary injunction barring its enforcement. Pending the outcome of litigation concerning the injunction, FinCEN will continue to accept BOI Reports filed voluntarily.

How Onerous are the CTAs Reporting Obligations?

The burden caused by BOI reporting for companies with simple ownership and control structures will typically be minor. Only a single initial BOI Report must be filed if the beneficial ownership of a reporting company does not change. However, any change in beneficial ownership triggers a requirement to file a new BOI report within 30 days. For companies with simple ownership and control structures, it seems likely that most CTA violations will be associated with failures to file initial BOI Reports and updated BOI Reports after ownership changes.

In contrast, the CTA may require significant effort from companies with more complex ownership and governance structures. The term “beneficial ownership” is defined expansively under the CTA and its regulations to include persons that might not qualify as owners or control persons under more commonplace definitions of those terms. For example, parties holding rights to future equity through warrants and convertible notes and parties that hold contractual control rights (e.g., through loan agreements), can be deemed owners or control persons.

Stiff Potential Penalties for Willful Violations

Willful violations of the CTA, including failing to file a BOI report and false reporting, can result in penalties. A “willful” violation is one that qualifies as a “voluntary, intentional violation of a known legal duty.” Penalties authorized by the CTA include a $500 civil penalty for each day that a violation continues. If the violation qualifies as criminal, a violator is subject to a fine of up to $10,000 and the violator can also be punished with up to 2 years in prison. These monetary penalty amounts are now higher due to inflation adjustments. Although penalties are potentially severe, as described in more detail below, FinCEN is not likely to focus penalty assessment efforts on minor, unintentional, and unknowing BOI reporting violations.

Filing Beneficial Ownership Information

FinCEN hosts a website for filing beneficial information reports at the following link: https://www.fincen.gov/boi. The CTA requires that reporting companies provide details on their beneficial owners, including their legal names, addresses, unique identification numbers, and birth dates. Reporting companies must also report their legal name, state (or other jurisdiction) of formation, and tax identification number. An authorized representative must certify that the information provided is correct. For many if not most companies, the associated reporting burden is not significant. For others, determining and reporting the identity of all beneficial owners will be a more complex endeavor.

Persons Subject to the CTA & Exemptions

The CTA applies to “reporting companies,” which term is broadly defined as including domestic and foreign corporations, limited liability companies, or similar companies operating in the United States, unless an exemption applies. FinCEN maintains that even companies formed in 2024 and dissolved before the 90-day due date for their report must file BOI Reports. In contrast, the CTA appears not to apply to general partnerships, including domestic general partnerships that elect to register as an LLP, a limited liability partnership.

Regulations issued under the CTA contain broad definitions of terms used in the CTA such as “ownership interest” and “substantial control” that can be viewed as expanding the CTA’s reach. For example, senior officers, persons with board representation, and lenders with control rights under financing arrangements can all qualify as beneficial owners whose identities are subject to disclosure under the CTA. The definition of “ownership interest” is very broad and includes profit interests, any put, call, straddle, or other option, and convertible instruments—such as convertible notes.

There are 23 regulatory exemptions which relieve reporting companies from BOI reporting obligations. Generally, these exemptions involve business entities that are already subject to significant regulatory oversight. There is also a detailed exemption for “inactive” companies existing before 2020, but persons subject to the CTA should scrutinize whether any exemption applies.

More on Penalties & Enforcement Actions

Both reporting companies and individuals can incur liability under the CTA. Any “person” can be liable for a violation. In many cases, beneficial owners have clear authority to act for a reporting company and to file a BOI report. But in the case of entities with unclear lines of authority, or in which certain beneficial owners fail to cooperate in sharing information, the CTA may lack clarity in identifying an appropriate individual against whom penalties can or should be assessed.

As stated above, FinCEN is likely to focus penalty assessment and enforcement efforts on bad actors and serious violations—rather than on reporting companies and individuals who unintentionally or unknowingly violate the CTA. This is true for several reasons (including those discussed below), especially when reporting companies cure violations voluntarily without notice.

First, assessment of penalties requires FinCEN to bring a formal enforcement action, which is typically a resource-intensive process even in administrative proceedings. Second, violations must be willful. And given the newness of the CTA BOI reporting regime, there are likely to be hundreds of thousands—and potentially millions—of unintentional and unknowing violations. In 2022, FinCEN estimated that 32.6 million companies would be subject to the CTA’s reporting requirements when they went into effect in 2024, and that an additional 5 million entities will become subject to them each year.[vii] A review of the enforcement actions brought by FinCEN to date (here: Enforcement Actions | FinCEN.gov) confirms that FinCEN enforcement efforts focus on relatively large institutions and bad actors, rather than on companies or individuals that voluntarily cure non-compliance.

Further, the enforcement criteria published by FinCEN weigh against the assessment of draconian penalties for inadvertent and insignificant violations that cause no harm. FinCEN uses these enforcement factors in determining the extent to which it will seek to enforce any potential penalty. Certain factors call for tougher enforcement, such as the following: the seriousness of a violation, including any harm to the public, financial gain, pervasiveness of the wrongdoing, a history of similar violations, and the impact or harm to FinCEN’s mission of policing the financial system and combatting money laundering. Mitigating enforcement factors call for diminished penalties, warnings, or no action. These include prompt action to comply, timely and voluntary disclosure, cooperation, and the duration of the violation. Consistent with these factors, FinCEN is more likely to focus on bad actors in future enforcement actions rather than punishing reporting companies that have unintentionally failed to comply with BOI reporting requirements.

Constitutional Concerns

Recent litigation in federal courts represents another reason FinCEN is likely to focus early enforcement efforts against bad actors rather than attempting widescale draconian enforcement. A few federal district courts have found that the CTA is likely constitutional but for reasons echoed by the Eastern District of Texas, an Alabama federal court has ruled that the CTA is unconstitutional (in contrast, that court did not issue a nationwide injunction).

In justifying the nationwide injunction issued in the Texas litigation, Judge Mazzant stated that the CTA is an “unprecedented law” that “marks a drastic two-fold departure from history” in that “it represents a federal attempt to monitor companies created under state law” and that it “ends a feature of corporate formation as designed by various States—anonymity.” He continued, calling the CTA a “quasi-Orwellian statute” that inserts federal regulation into “a matter our federalist system has left almost exclusively to the several States” with serious “implications on our dual system of government.” According to Judge Mazzant, the CTA “appears likely unconstitutional.”

Conclusion

Assuming the CTA becomes enforceable at some point, FinCEN is likely to exercise significant restraint in assessing penalties for minor BOI reporting violations. This conclusion is drawn from the intent of the CTA, FinCEN’s enforcement factors, resource-scarcity, the wide net cast by the CTA, and recent questions concerning both the constitutionality of the CTA and the punitive authority of administrative tribunals. Unknowingly or unintentionally violating the deadline for filing BOI Reports in a timely manner is probably the least likely to result in an enforcement action. But as time passes, violations become more likely to drift into the realm of intentional non-compliance.

In view of the CTA’s existing and impending reporting deadlines and potential penalties, reporting companies and their managers should consider taking prompt action to file or prepare to file BOI reports. Nonetheless, it is certainly not a given that the CTA will pass constitutional muster. Diligence is warranted, but awaiting the outcome of CTA litigation is a reasonable choice to which “reporting companies” are entitled.

[i] Beneficial Ownership Information Reporting | FinCEN.gov

[ii] The CTA is codified at 31 U.S. Code § 5336, et seq.

[iii] Corporate Transparency Act.

[iv] Texas Top Cop Shop, Inc., et al v. Garland et al, No. 4:2024cv00478 – Document 40 (E.D. Tex. 2024)..

[v] Texas Top Cop Shop, Inc., et al. v. Garland, et al., 24-40792 (5th Cir., Dec. 16, 2024).

[vi] Beneficial Ownership Information Reporting | FinCEN.gov (Alert: December 27, 2024).

[vii] Beneficial Ownership Information Reporting Requirements, Federal Register, Volume 87 Issue 189 (Friday, September 30, 2022)