CORPORATE TRANSPARENCY ACT
June 04, 2024
Florida is considered one of the best business climates in the U.S. for several reasons. The most important reason for many is the fact that the Sunshine State does not impose corporate income tax on limited partnerships or subchapter corporations. Another reason is the ease with which a Florida business can be formed. The Division of Corporations has a website, commonly referred to as Sunbiz, which enables prospective business owners to register their business in a simple and efficient manner. While formation of the company is not limited to the Sunbiz registration, and should also include the request of a tax identification number as well as preparation of other documents such as operational agreements, shareholder agreements, stock/share certificates, and others, there is typically no additional registration required.
This all changed as a result of the Federal Corporate Transparency Act (CTA), which was enacted by Congress in 2021 with the intent of preventing, identifying, and combatting financial crimes. This law primarily applies to small entities and, while there are some limited exemptions, most companies in the United States are now required to report to the Financial Crimes Enforcement Network (a bureau of the U.S. Department of the Treasury commonly referred to as “FINCEN”) information about their beneficial owners (the individuals who ultimately own or control the company).
Identifying the beneficial owners may not be as simple as it seems. This would include any person who exercises substantial control or owns the company, including senior officers, individuals who have authority over officers or directors, important decision-makers, and others. Beneficial owners also include all individuals who control at least 25% of the ownership interests of a company. It is important to note that companies can have more than one beneficial owner, and that each of those beneficial owners must be reported.
The CTA has important deadlines that all businesses must be aware of. Specifically, all non-exempt companies formed on or after January 1, 2024 must file their FINCEN report within 90 days from the date of formation, and all companies formed prior to January 1, 2024 must file their FINCEN report before January 1, 2025. Failure to do so can result in penalties up to $500.00 per day, and up to two (2) years in prison, and a fine up to $10,000.00.
The CTA has had plenty of detractors, both before and after its passing. Opposition continues to be fierce, and there are numerous cases making their way through the Court system. In March 2024 a federal district court in Alabama ruled that the CTA is unconstitutional because it exceeds Congress’ enumerated powers. The court permanently enjoined the government from enforcing the CTA only as to the plaintiffs in that case, but did not issue a nationwide injunction preventing the law from being enforced against other entities. But the Justice Department has filed an appeal in the Eleventh Circuit on behalf of the
Department of the Treasury. If the Eleventh Circuit publishes its ultimate decision in the case, and assuming no Supreme Court review, then the opinion would create binding precedent on the unconstitutionality of the CTA in Alabama, Florida, and Georgia, which could create more certainty in those jurisdictions.
Similar challenges to the CTA in other jurisdictions is inevitable. Ultimately, the issue would likely not be resolved nationwide without Supreme Court review (or review in each of the other federal courts of appeals), action from Congress, or the government’s acquiescence in the Northern District of Alabama’s decision. It may be several years before we see a definitive answer. But in the meantime, and in light of the narrow scope of the judgment in the case, companies and persons that were not a plaintiff to the case are still obligated to meet the CTA reporting deadlines.
Therefore, as a result of CTA, gone are the days when small business owners only had to register their company with Sunbiz. In addition to that, they must also register the business’ beneficial owners with FINCEN, or otherwise face penalties, fines, and even imprisonment.
