Corporate Transparency Act Update

Understanding the implications of the Corporate Transparency Act (CTA)

Under the Corporate Transparency Act (CTA), which took effect January 1, 2024, many business entities including small limited liability companies (LLCs) and partnerships are required to file reports with the Treasury Department’s Financial Crime Enforcement Network (FinCEN). In these filings, applicable businesses must disclose important information about their entity. However, recent developments have called into question the constitutionality of these requirements.

What Is the Corporate Transparency Act, and what are the Requirements?

The CTA is a federal law that requires business entities, referred to as reporting companies, to disclose certain information about the company and its owners to FinCEN. Under the CTA, a reporting company is defined as a corporation, LLC, or similar entity that is (i) created by filing a document with the secretary of state or a similar office under the laws 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.^[1] The following information about reporting companies in the United States must be included in the report:^[2]

the company’s full legal name and any trade name or doing business as (d/b/a) name
street address of the principal place of business
jurisdiction where the business was formed
tax identification number

Additionally, the reporting company must provide the following information to FinCEN about its beneficial owners, defined as persons who hold significant equity (25 percent or more ownership interest) in the reporting company or who exercise substantial control over the reporting company:^[3]^[4]

full legal name
date of birth
current residential or business address
unique identification number from an acceptable identification document or FinCEN identifier

For reporting companies created on or after January 1, 2024, the same information must be provided about the company applicant, the person that files the creation documents for the reporting entity.^[5]

Some Current Litigation

National Small Business United v. Yellen

On Friday, March 1, 2024, in National Small Business United v. Yellen, Judge Liles C. Burke of the United States District Court for the Northern District of Alabama ruled via memorandum opinion that the CTA is unconstitutional because Congress lacks the authority to require companies to disclose personal stakeholder information to FinCEN.^[6] The National Small Business Association (NSBA), an Ohio nonprofit organization representing more than 65,000 businesses from all 50 states, and Issac Winkles, an NSBA member and owner of two small businesses, had brought suit against the US Department of the Treasury and Treasury Secretary Janet Yellen, alleging that the mandatory disclosure requirements imposed by the CTA exceeded Congress’s authority under Article I of the US Constitution and violated the First, Fourth, Fifth, Ninth, and Tenth Amendments. The US Department of Justice has since filed an appeal of the district court’s decision with the US Court of Appeals for the Eleventh Circuit asserting that the CTA is constitutional.

Boyle v. Yellen

On March 15, 2024, William Boyle initiated a lawsuit in the US District Court for the District of Maine alleging that the CTA is unconstitutional.^[7] The lawsuit states that Congress exceeded its authority under Article 1 of the Constitution and encroached upon the states’ respective sovereignties in violation of the Ninth and Tenth Amendments and constitutional principles of federalism and retained state sovereignty.^[8]

Small Business Association of Michigan v. Yellen

On March 26, 2024, the Small Business Association of Michigan, Chaldean American Chamber of Commerce, Steward Media Group, LLC, Power Connections Co, LLC, Derek Dickow, Semper Real Estate Advisors, LLC, and Timothy A. Eisenbraun, filed a complaint for declaratory judgment and injunctive relief alleging that Congress exceeded its constitutional authority, the CTA amounts to an unreasonable search and seizure, and the CTA is a violation of due process.^[9] In response, the US Department of Justice has filed a brief asserting the constitutionality of the CTA.

Where Do We Go from Here?

With one case decided, two awaiting further proceedings, and other lawsuits being filed, there will be little change for most business owners. The decision in Alabama only applies to the named plaintiffs; anyone who was not part of that case is still required to comply with CTA requirements. We understand that the landscape is constantly evolving, and we are here to keep you updated so you can comply with all applicable laws.

If you have questions about the next steps, call Andre O. McDonald, a knowledgeable Howard County, Montgomery County and District of Columbia estate planning, special-needs planning and Medicaid planning attorney at (443) 741-1088; (301) 941-7809 or (202) 640-2133 to discuss your CTA needs.

DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE OR TAX ADVICE.

^[1] 31 U.S.C. § 5336(a)(11).

^[2] 31 C.F.R. § 1010.380(b)(1)(i).

^[3] 31 U.S.C. § 5336(a)(3)(A).

^[4] 31 U.S.C. § 5336(b)(2)(A).

^[5] Id.

^[6] No. 5:22-cv-1448, 2024 WL 899372133, A.F.T.R.2d 2024-885 (N.D. Ala. 2024).

^[7] No. 2:24-cv-00081-LEW (D. Me. 2024), https://www.taxnotes.com/research/federal/court-documents/court-petitions-and-briefs/constitutionality-corporate-transparency-act-challenged-maine/7jb8q.

^[8] Id.

^[9] No. 1:24-cv-314 (D. Mich. 2024), https://www.taxnotes.com/research/federal/court-documents/court-petitions-and-briefs/business-groups-challenge-transparency-act-unconstitutional/7jcm8.

Original Article (from December 2023)

What is the Corporate Transparency Act?

The Corporate Transparency Act is a law that requires business entities it identifies as reporting companies to disclose certain information about the company and its owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Under the CTA, a reporting company is defined as a corporation, limited liability company (LLC), or other similar entity (i) created by filing a document with the secretary of state or a similar office under the laws 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.^[1] The following information about the reporting company must be included in the report^[2]:

company’s legal name and any trade names or doing business as (d/b/a) name
street address of the principal place of business
jurisdiction where the business was formed
tax identification number

full legal name
date of birth
current address
unique identification number from an acceptable identification document

For reporting companies created on or after January 1, 2024, the same information must be provided about the company’s applicant, who is the person that files the creation documents for the reporting entity.

Note: Although a trust is not considered to be a reporting company under the CTA, if your trust owns an interest in a reporting company, such as an LLC, certain information about your trust may also have to be disclosed under the CTA because it may be deemed to be a beneficial owner.

Does the Corporate Transparency Act impact you?

Many business regulations apply only to large businesses, but the CTA specifically targets smaller entities. If you own a small business, you may be subject to this act unless your business falls under one of the stated exemptions, which primarily apply to industries that are already heavily regulated and have their own reporting requirements. Your business may also be exempt from the reporting requirements if it employs more than 20 full-time employees, filed a return showing more than $5 million in gross receipts or sales, and has a physical office located within the United States.^[4]

Complying with the requirements of the CTA is of the utmost importance if you own a business entity or have one as part of your estate plan. We routinely create entities that might qualify as reporting companies as part of our clients’ estate plans. These include LLCs and family limited partnerships.

Limited Liability Companies

An LLC is a business structure that can own many types of accounts and property. These entities can be used to provide asset protection and probate avoidance.

Asset Protection

Because an LLC is a separate legal entity from its members, the LLC’s creditors can typically recover only business debts from the LLC’s money and property, not the member’s personal accounts or property. Also, if the proper formalities are in place, the member’s personal creditors may not be able to reach the LLC’s accounts and property to satisfy the member’s personal debts.

Note: In some states, a single-member LLC does not enjoy the same protection from the member’s personal creditors. The rationale of these laws is that your creditors should be able to recover your personal debts through your LLC interests to satisfy their claims because there are no other members that will be negatively impacted by the seizure of money and property owned by the LLC.

Probate Avoidance

Anything that is owned by the LLC—retitled into the name of the LLC during your lifetime, bought by the LLC, or transferred by operation of law at your death—will not go through the

public, costly, and time-consuming probate process. The probate process only transfers

accounts and property that you owned at your death. By using an LLC to own accounts and property, the LLC—not you—owns them. However, if you own the membership interest in your own name, the transfer of the membership interest at your death may still need to go through the probate process.

Family Limited Partnerships

A family limited partnership (FLP) is an entity owned by two or more family members, created to hold the accounts, properties, or businesses that were contributed by one or more of the family members. An FLP has at least one general partner who is responsible for the management of the partnership, has unlimited liability, and is compensated by the partnership for their work according to the partnership agreement. An FLP also has one or more limited partners who are permitted to vote on the partnership agreement but are not authorized to manage the partnership. The limited partners receive the income and profits of the partnership but have no personal liability for the partnership’s debts or obligations.

Asset Protection

This estate planning strategy is useful because an FLP can help protect accounts, properties, and businesses held by the entity from your and your family’s creditors, because those items are not owned by you and your family as individuals but instead are owned by the entity. If a creditor obtains a judgment against you or your family for a claim not related to the FLP, it is more difficult for the creditor to access anything that the FLP owns to satisfy that claim.

Tax Planning

Also, because of its lack of control and restrictions on selling a partnership interest, the value

of a limited partnership interest that you give to a family member can be discounted, allowing you to maximize your annual gift tax exclusion and lifetime estate and gift tax exemptions.

What do you have to do to comply with the CTA?

In order to comply with the act, you should gather the required information for all reporting companies you own and all other beneficial owners. For entities created before January 1, 2024, submit the initial reports for each reporting company by January 1, 2025. For entities created on or after January 1, 2024, and before January 1, 2025, submit the initial reports within 90 days of the entity’s creation. Entities created on or after January 1, 2025, will have 30 days to submit the reports.

Having a business entity as part of your estate plan can be an excellent tool depending on your unique situation. If you currently have one of these entities or are considering forming one, please reach out to us to discuss next steps to ensure that you fully comply with the requirements of the Corporate Transparency Act. Give us a call to schedule an appointment.

At McDonald Law Firm, our estate planning attorney is in the business of addressing these complex issues in a professional and legal manner and creating a plan that leaves nothing to chance. To start planning today, contact Andre O. McDonald, a knowledgeable Howard County, Montgomery County and District of Columbia estate planning, special-needs planning and Medicaid planning attorney at, (443) 741-1088; (301) 941-7809 or (202) 640-2133 to schedule a consultation.

DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE OR TAX ADVICE.

^[1] 31 U.S.C. § 5336(a)(11).

^[2] 31 C.F.R. § 1010.380(b)(1)(i).

^[3] 31 U.S.C. § 5336(b)(2)(A).

^[4] Id. § 5336(a)(11)(B)(xxi).