Impact of Alabama's Ruling on the Corporate Transparency Act: What Businesses in Other States Need to Know for 2024

R. Todd Frahm, Partner & Greg Norris, Law Clerk

June 3, 2024

Introduction

In a recent article, Tyler Law advised its clients of new legislation and regulations requiring businesses to comply with reporting requirements required by the newly enacted Corporate Transparency Act (CTA).  That article can be read here.

This law was recently challenged in Alabama in Nat’l Small Bus. United v. Yellen.  The plaintiffs prevailed and the law was deemed unconstitutional as overly broad.  On March 4, 2024, FinCEN (the government organization charged with collecting the data required by CTA) released a statement indicating that FinCEN would comply with the court’s order “for as long as it remains in effect” and that the government would not currently enforce the CTA against the plaintiffs.   This compliance included all members of the National Small Business Association (NSBA)(as of March 1, 2024, the date of the injunction).  However, the Department of the Treasury is expected to appeal against this decision and request a stay of the injunction.

The details of the challenge to CTA.

In the recent legal challenge to the Corporate Transparency Act (CTA) requirements and its constitutionality, plaintiffs Isaac Winkles and the National Small Business Association (NSBA) prevailed and the law was deemed overly broad and unconstitutional.   The question presented by the Yellen Court was: “Does the Constitution give Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a State?  The Yellen Court concluded that the Government had not proved their case, and that the Government's arguments are not supported by precedent. As a result, the Yellen Court concluded any member of the NSBA in Alabama will not be required to file with FinCEN in accordance with CTA until further notice.

The Yellen Court noted that the text of the CTA is wide-ranging in scope. The CTA regulates reporting companies defined as "corporations, limited liability companies, or other similar entities that are either "(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 law of a foreign country and registered to do business in the United States.   The Yellen Court also stated:  “CTA exempts twenty-four kinds of entities from its reporting requirements, including banks, insurance companies, and entities with more than twenty employees and five million dollars in gross revenue, and a physical office in the United States.

Who is required to file beneficial ownership information with FinCEN?

The most relevant portions of the CTA in regard to who must file include the following:

What is an “applicant”?

The term “applicant” means any individual who files an application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe; or

registers or files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the Secretary of State or similar office under the laws of a State or Indian Tribe.

What is a “reporting company?

The term “reporting company” means a 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 law 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.

What is not a reporting company?

A reporting company does not include—

(i) an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934

(ii) an entity established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State, or under an interstate compact between 2 or more States; and

that exercises governmental authority on behalf of the United States or any such Indian Tribe, State, or political subdivision;

(iii) a bank;

(iv) a Federal credit union or a State credit union;

(v) a bank holding company;

(vi) a money transmitting business registered with the Secretary of the Treasury;

(vii) a broker or dealer that is registered under section 3 of the Securities Exchange Act;

(viii) an exchange or clearing agency;

(ix) any other entity not described in clause (i), (vii), or (viii) that is registered with the Securities and Exchange Commission;

(x) an entity that is an investment company as defined in the Investment Company Actor an investment adviser as defined in Investment Advisers Act, and  is registered with the Securities and Exchange Commission under the Investment Company Act;

(xi) an investment adviser described in the Investment Advisers Act;

(xii) an insurance company as defined in the Investment Company Act;

(xiii) an entity that is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State; and has an operating presence at a physical office within the United States;

(xiv) a registered entity as defined in the Commodity Exchange Act or an entity that is a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor (as defined in the Commodity Exchange Act, or a retail foreign exchange dealer, as described in that Act; and registered with the Commodity Futures Trading Commission under the Commodity Exchange Act;

(xv) a public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002;

(xvi) a public utility that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States;

(xvii) a financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act;

(xviii) any pooled investment vehicle that is operated or advised by a person described in clause (iii), (iv), (vii), (x), or (xi);

(xix) any organization that is described in section 501(c) of the Internal Revenue Code and exempt from tax under section 501(a) of such Code;

(II) political; or

(III) trust described in paragraph (1) or (2) of section 4947(a) of such Code

(xx) any corporation, limited liability company, or other similar entity that—

(I) operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in clause (xix);

(II) is a United States person;

(III) is beneficially owned or controlled exclusively by 1 or more United States persons that are United States citizens or lawfully admitted for permanent residence; and

(IV) derives at least a majority of its funding or revenue from 1 or more United States persons that are United States citizens or lawfully admitted for permanent residence;

(xxi) any entity that employs more than 20 employees on a full-time basis in the United States, filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of other entities owned by the entity; and other entities through which the entity operates; and has an operating presence at a physical office within the United States;

(xxii) any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by 1 or more entities described in clause (i), (ii), (iii), (iv), (v), (vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi), (xvii), (xix), or (xxi);

(xxiii) any corporation, limited liability company, or other similar entity—

(I) in existence for over 1 year;

(II) that is not engaged in active business;

(III) that is not owned, directly or indirectly, by a foreign person;

(IV) that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000 (including all funds sent to or received from any source through a financial account or accounts in which the entity, or an affiliate of the entity, maintains an interest); and

(V) that does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity;

(xxiv) any entity or class of entities that the Secretary of the Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has, by regulation, determined should be exempt from the requirements of subsection (b) because requiring beneficial ownership information from the entity or class of entities—

(I) would not serve the public interest; and

(II) would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.

In summary, CTA seems to be targeting primarily small businesses defined as entities with 20 employees or less with gross receipts of five million dollars or less per year.  CTA is also targeting foreign owned businesses.

How will the Yellen Court’s decision affect other states?

For now, the Yellen Court’s decision will likely not affect other states requirements to comply with the law unless the law is also challenged in other jurisdictions and the court finds as Alabama did that the law is constitutionally overly broad.  For now, FinCEN has agreed not to require anyone who is a part of the organization National Small Business Association to comply with CTA’s requirements.  What is unclear is whether this was intended to apply to members outside of this jurisdiction. If you are a member of this association in Alabama, you are exempt.  If not, FinCen has not made it clear whether or not it will apply to all other states.  For now, all other business entities that were otherwise required to file are still obligated to do so. However, even the injunction for NSBA members in Alabama could be short lived. If the Department of Treasury does appeal and is granted the stay of the injunction, NSBA businesses in Alabama will still need to comply with reporting to FinCEN as required by the statutes and regulations or face fines and potentially jail time.

What is at stake?

In summarizing why a business should be concerned with the requirements imposed by CTA, the Yellen Court noted that knowing or willful violations carry serious civil and criminal penalties.

1.  A willful provision of false or fraudulent beneficial ownership information or failure to report complete or updated beneficial ownership information to FinCEN by any person is punishable by a $500 per day civil penalty and up to $10,000 in fines and 2 years in federal prison.  

2.  A knowing and unauthorized disclosure or use of beneficial ownership information by any person is punishable by a $500 per day civil penalty, along with a $250,000 fine and 5 years in federal prison.  

3.  A knowing and unauthorized use or disclosure while violating another federal law or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period by any person is punishable with a $500,000 fine and 10 years in federal prison,  

In short, a failure to report can have serious consequences. Until the Department of Treasury appeals the decision and the decision is either affirmed or reversed, businesses who fall within those businesses required to file should be prepared to do so.

Tyler Law is prepared to assist in proper filings to avoid these potential consequences. If you are interested in assistance filing the needed paperwork to comply with CTA requirements, please contact us at 951-600-2733, or click on the link below:

Give Us a Call

Riverside County: (951) 600-2733

Orange County: (714) 978-2060

Northwest Arkansas: (479) 377-2059

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