Aimee B. Davis Law P.C.

Compliance with the Corporate Transparency Act is a Legal Hot Potato

Since becoming effective January 1, 2024, I’ve received many email alerts from accountants and attorneys announcing The Corporate Transparency Act (CTA).

 

What is the CTA?

close up of business person's hand on virtual to-do list

The CTA is an anti-money laundering act requiring millions of small businesses (each a “Company”) to file Beneficial Ownership Information (BOI) reports for the Company, its beneficial owners, and the Company applicants with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Until now, ownership of most U.S. Companies was generally private information, reportable only to the IRS. In December 2023, NYS passed the New York LLC Transparency Act (NYLTA), requiring disclosure of personal information about an LLC’s beneficial owners. A mechanism to comply with NYLTA will be imposed later this year. 

 

Most CTA alerts outline the law’s key requirements, including timeframes for complying (which depend on when the Company was created), what information must be filed, and the potential civil penalties ($500-per-day fine (up to $10,000)) and criminal penalties for the willful failure to comply.

 

BOI reporting requirements seem reasonably straightforward, but they have a lot of people unhappy and I have concerns about the nuances of compliance, including:

  1. How are small businesses expected to know about this law? Will they know/remember to update BOI reports if/when changes occur in the Company or its beneficial owners? As a corporate attorney, I’ve begun informing my clients about the law. Accountants may be doing the same, but those I’ve spoken with worry that making these filings on behalf of clients could constitute the unauthorized practice of law. While it’s the Company’s responsibility to ensure compliance, I’ve heard that some general counsel don’t even know about it.
  2. I won’t soon forget the anxiety I experienced as a junior associate in BIG LAW determining who the beneficial owners were of complex corporate clients. Throughout my 30-year career, deciding who the beneficial owners are of a Company was a legal determination. It’s one of the things securities lawyers get paid the big bucks to do. At the risk of fines and/or imprisonment for up to 2 years, I’m concerned business owners may make costly mistakes in BOI reports, unless they engage competent corporate counsel, such as Aimee B. Davis Law P.C.
  3. Until now, I generally haven’t collected nor transmitted my client’s personal information. Making these filings and/or facilitating them seems like a cybersecurity disaster waiting to happen. Precautions for protecting this data must be taken. Nevertheless, I expect BOI reports will be made public soon, intentionally or unintentionally.
  4. Under the CTA, the definition of a beneficial owner is an individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of its ownership interests. This definition is broader than disclosure required under Federal securities laws by including individuals who don’t own any stock/equity in the reporting Company, such as general counsel. When does the advice of outside counsel tip the scale and become “indirectly exercising substantial control over the reporting company?” No one wants to be the test case.

 

For these and other reasons, compliance with CTA has quickly become a legal hot potato.

 

Since the legal and practical issues with compliance are like an infestation, I’ve generally advised clients formed before January 1, 2024 to wait a few months before filing, so FinCEN can “eliminate the bugs in the system.” What are your thoughts?

 

If you have questions about or need assistance complying with the CTA, please reach out to Aimee B. Davis Law P.C.

Aimee B. Davis Law P.C. is committed to advising its clients and resolving issues relating to the legal and business matters that are important to them. If you have any questions, please feel free to contact us at (917) 617-2243 or email aimee@aimeebdavis.com.

Aimee B. Davis Law P.C.

917-617-2243
122 Ashland Place
Brooklyn, NY 11201