The Corporate Transparency Act (CTA), which came into effect on Jan. 1, 2024 has significant implications for government contractors and commercial businesses. This client alert summarizes recent developments in the CTA—including constitutionality, physical office requirements, unpopulated joint ventures, and substantial control— to help businesses comply and avoid harsh enforcement penalties. If you formed an entity on or after Jan. 1, 2024, and are not subject to one of the exemptions, then you must file your initial Beneficial Ownership Information (BOI) report within 90 days from the effective date of creation or registration of the entity. This is especially important for any joint ventures formed on or after Jan. 1, 2024.

Background

As reported by PilieroMazza, the CTA is legislation enacted by Congress in 2021 that requires privately held U.S. businesses to report certain identifying information for all “beneficial owners” of such businesses to the Treasury Dept.’s Financial Crimes Enforcement Network (FinCEN); the result of the reporting will be a central registry of beneficial owners that can be searched by various governmental entities. Importantly, FinCEN has a powerful enforcement mechanism.

The willful failure to report, complete, or update beneficial ownership information to FinCEN—or the willful provision of or attempt to provide false or fraudulent beneficial ownership information—may result in civil or criminal penalties.

Civil penalties include up to $500 for each day that the violation continues or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of any entity that fails to file a required BOI report may be held accountable for that failure.

Ruling from Alabama District Court

On March 1, 2024, an Alabama federal court ruled in National Small Business United v. Yellen that the beneficial ownership information (BOI) reporting requirements established by the CTA are unconstitutional (See article in March 15, 2024 edition of Set-Aside Alert).

However, it’s essential to note that this ruling only applies to the plaintiffs in the case. Additionally, the government has already appealed the decision, resulting in a protracted timeline of uncertainty.  For now, the CTA remains in effect for other covered reporting companies.

Deadlines for BOI reporting

For new entities that are formed in 2024 and are not exempted from reporting, we advise filing the BOI report within the 90-day deadline. For entities formed before 2024, the deadline to file a report is not until Jan. 1, 2025; for these existing entities, we recommend preparing to provide the BOI report and allow time to monitor updates and guidance as the situation evolves.

In any event, the enforcement penalties for failure to file a BOI report are quite harsh, and the safest option is to timely file a BOI report.  To be clear, the CTA remains in effect notwithstanding the Alabama federal court decision and you should comply with the reporting requirements.

Qualifying for the Large Operating Business Exemption

The CTA mandates that most entities, including LLCs and corporations, report beneficial ownership information. However, there are a number of exceptions, including an exemption for large operating businesses. To qualify, a company must satisfy six criteria, with the three primary elements discussed below.

–Employees: The company must have more than 20 full-time employees. However, this total must be independent of any affiliates (a company cannot aggregate total employees across affiliated entities); each of the employees must work for the company for a minimum of 30 hours a week; and the individuals must be statutory employees; leased employees (or independent contractors (1099s)) do not count as employees.

–Revenue: The entity must have reported more than $5 million in U.S.-based gross sales or receipts. Unlike the employee metric above, this number can be the aggregate of all U.S. revenues across affiliates in cases where there is a consolidated tax return or all taxable income flows through to a parent. For example, for a limited liability company (LLC) parent with multiple wholly-owned LLC subsidiaries that elected pass-through taxation, the total sales are aggregated to the parent. Importantly, this metric is based on the most recent tax return; thus, new entities will not qualify for this exemption, no matter the sales. Also, if a large operating company is sold and the tax status is changed as a result, the company may lose its exemption.

–Physical Office: The company must have a “physical operating location.” While many of our clients satisfy the numbers based metrics discussed above, we are finding this third element is causing headaches. This element requires the company maintain a physical office in the U.S. that: (i) the entity owns or leases; (ii) is where it regularly conducts its business; AND (iii) is physically distinct from the place of business of any other unaffiliated entity. Since many businesses abandoned their physical office space during COVID, we are seeing companies with clearly large operating businesses, no longer have a physical space that qualifies. It is not clear yet whether arrangements like subleased office space or dedicated space at a workshare site satisfy these requirements.

~ By Meghan F. Leemon, partner, and Paul H. Tracy, associate PilieroMazza PLLC