Our Firm provides outside general counsel services to many businesses in Alabama and Mississippi. As the new year gets off to a fast start, I thought I’d write about a new reporting and compliance requirement for certain small businesses under the federal Corporate Transparency Act (CTA). The CTA is part of the larger William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA), Pub.L. No. 116-283 (H.R. 6395). The anti-money laundering provisions discussed below are found in §§ 6001-6511 of the NDAA. The CTA includes §§ 6401-6403 of the NDAA. Substantive provisions of the CTA can be found at § 6403. See also 31 U.S.C. § 5336.
The obligations took effect January 1, 2024, and are intended to make it more difficult for persons and businesses to engage in money laundering activities and associated criminal activities. Businesses must disclose their “beneficial ownership” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of Treasury.
Who Must Report?
- Domestic corporations, limited liability companies, and other entities created in the United States by filing of a document with a secretary of state or similar office under the law of a state or Indian tribe.
- Foreign corporations and limited liability companies registered to do business in the United States by filing of a document with a secretary of state or similar office under the law of a state or Indian tribe.
Reporting Exemptions.
A small business would be well-served to engage legal counsel to determine whether any of the following exemptions apply:
- Securities reporting issuer
- Governmental authority
- Bank
- Credit union
- Depository institution holding company
- Money services business
- Broker or dealer in securities
- Securities exchange or clearing agency
- Other Exchange Act registered entity
- An investment company or investment adviser
- Venture capital fund adviser
- Insurance company
- State-licensed insurance producer
- Commodity Exchange Act registered entity
- Accounting firm
- Public utility
- Financial market utility
- Pooled investment vehicle
- Tax-exempt entity
- Entity assisting a tax-exempt entity
- Subsidiary of certain exempt entities
- Inactive entity
- Large Operating-Companies
Large Operating-Company Exemption.
The reporting requirements are clearly aimed at small businesses. If your business meets all of the following criteria, it may not be required to disclose beneficial ownership to FinCEN:
- The business employs more than 20 full-time employees in the United States,
- The business has an operating presence at a physical office in the United States, and,
- The business filed a Federal income tax or information return in the United States for the previous year reporting more than $5,000,000 in gross receipts or sales from sources within the United States on applicable IRS forms.
When Must a Qualifying Business Report?
- Qualifying businesses created or registered before January 1, 2024, must file their initial beneficial ownership information (BOI) report by January 1, 2025.
- Qualifying businesses created or registered on or after January 1, 2024, have 90 days after receiving notice of the business’s creation or registration to file its initial BOI report.
- Qualifying businesses created or registered on or after January 1, 2025, have 30 days after receiving notice of the business’s creation or registration to file its initial BOI report.
The reporting period begins to run from the earlier of 1) the date the business receives actual notice of its creation, or 2) after the secretary of state or other similar official gives public notice of the business’s creation or registration.
Beneficial Owners.
The beneficial owner of a qualifying business is an individual who directly or indirectly 1) exercises substantial control over the qualifying business, or 2) owns or controls at least 25% of the ownership interests of a qualifying business.
If a person meets any of the following criteria concerning the person’s involvement with a qualifying business, the person may exercise substantial control:
- The person is a senior-level officer in the business,
- The person has the authority to appoint or remove officers or a majority of the directors of the business,
- The person is an important decision-maker in the business concerning the business’s operations, finances, or structure,
- The person possesses any other form of substantial control (a catch-all provision).
Ownership interests in a qualifying business include equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. A reporting company may have multiple types of ownership interests.
Additional Requirements.
Reporting businesses must also update and correct previously filed reports. Some of these changes include:
- Changes to the information reported for the reporting company, such as registering a new DBA,
- A change in beneficial owners, including death of a beneficial owner,
- Changes to a beneficial owner’s name, address, or unique identifying number provided in a BOI report,
How Does a Qualifying Business Comply?
A qualifying business may authorize anyone to file a report, including employees, owners, or professional services providers like law firms. Qualifying businesses should file through the FinCEN’s electronic filing system found at https://www.fincen.gov/boi
Penalties For Failing to Report.
A qualifying business, senior officers of the qualifying business, and beneficial owners of the qualifying business are subject to a range of civil and criminal penalties for failing to timely report.
Additional Resources.
The U.S. Department of Treasury’s Financial Crimes Enforcement Network has several valuable resources for small businesses https://www.fincen.gov/boi/small-entity-compliance-guide. Additionally, lawyers at Christian & Small are assisting small businesses in Alabama and Mississippi with CTA reporting obligations along with a range of other regulatory, transactional, and litigation issues facing small businesses.
M. Jansen Voss has developed a diverse defense litigation and appellate practice in both state and federal courts in Alabama and Mississippi. He serves as outside general counsel to a wide range of businesses, governmental entities, and individuals in complex personal injury and wrongful death lawsuits, as well as business disputes and breach of contract matters.
About Christian & Small
Christian & Small LLP represents a diverse clientele throughout Alabama, the Southeast, and the nation with clients ranging from individuals and closely held businesses to Fortune 500 corporations. By matching highly experienced lawyers with specific client needs, Christian & Small develops innovative, effective, and efficient solutions for clients. With offices in Birmingham, metro-Jackson, Mississippi, and the Alabama Gulf Coast, Christian & Small focuses on the areas of litigation and business, is a member of the International Society of Primerus Law Firms, and is a Mansfield Rule™ Participating Law Firm. Our corporate social responsibility program is focused on education, and diversity is one of Christian & Small’s core values. Please visit www.csattorneys.com for more information.
No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.