If you’re not familiar with the Corporate Transparency Act, a law mentioned in these spaces a few days ago, you are not alone, according to Kristine Tidgren, director of the Center for Agricultural Law and Taxation at Iowa State University.

The Corporate Transparency Act, aimed at preventing money laundering and other corrupt transactions, overcame a presidential veto on Jan. 1, 2021, a time when the nation’s attention was transfixed on other issues.

Since then, the U.S. Treasury Department, charged with enforcing the act, has been putting together a system that could identify and track the ownership of an estimated 32.6 million small businesses that could fall under the purview of the law when it took effect on Jan. 1 of this year.

Hiding money

“It really is to prevent shell corporations and money laundering,” said Tidgren. “People have all these great ways of hiding money, and they do it because there has been no consistent law. Most states do not have ownership records of the people who own their corporations or LLCs.”

Tidgren spoke on the “Corporate Transparency Act: New Reporting Requirements & Litigation Updates” during a National Agricultural Law Center Webinar on March 20. Harrison Pittman, the Center’s director, referred to the law in a speech at the Mid-South Farm and Gin Show that was covered in Delta Farm Press.

Congress has tried to pass such legislation for decades, but it wasn’t until December of 2020 when the votes came together to address the issue. Then-president Trump vetoed the bill, but both Houses of Congress overrode the veto on Jan. 1, 2021.

“Congress had been briefed on the problem posed by shell corporations contributing to financial crimes and federal agencies being unable to prosecute them,” said Tidgren. “When it passed, nobody was really paying much attention. Then, 2024 came, and everybody realized, wow, this is a big deal.”

Online reports

Basically, the law requires small business entities, including single member limited liability corporations or LLCs, to file online reports disclosing information about their beneficial owners. Entities formed before Jan. 1, 2024, have until Jan. 1, 2025 to file. Those formed after Jan. 1 of this year have 90 days to file.

It includes any domestic entity that was created by filing a document with their state’s secretary of state’s office or a similar office under the law of a state or an Indian tribe. Foreign reporting companies fall under a different set of rules.

Large corporations, those with more than 20 fulltime employees who filed a U.S. tax return with more than $5 million in gross receipts for the previous year, are exempt from the Beneficial Ownership Information or BOI filing requirements.

“The government already knows who owns the large entities,” she said. “They already know where to show up if there’s a problem.”

The information must be reported to the Financial Crimes Enforcement Network or FinCEN, a Treasury Department unit tasked with creating a national registry of the beneficial owners of all the entities covered by the CTA.

Jurisdiction

Both FinCEN and the Internal Revenue Service are part of the Treasury Department, but the IRS has no jurisdiction over FinCEN. “They’re not allowed to disclose this information unless it is authorized by the CTA,” she said. “And it’s not information that can be requested via a Freedom of Information Act request.

“FinCEN can share it with governmental agencies, such as the Justice Department, and financial institutions. It cannot be disclosed without your authorization, but, if you give your consent, they will disclose this information to financial institutions.”

The Bank Secrecy Act requires banks to report beneficial ownership information for their entity clients to FinCEN. “The new BOI rules do complicate a bank’s job because they may want to see who their client is reporting in their CTA report,” she said. “The Bank Secrecy Act may require banks, as part of due diligence, to know what entities are reporting to FinCEN.”

Unconstitutional

The law has been challenged, and on March 1, a federal judge in the Northern District of Alabama ruled the CTA was unconstitutional because Congress had exceeded its powers in the Commerce Clause.

The Justice Department appealed the decision to the 11^th Circuit Court of Appeals. A stay granted in the case only applies to the 65,000 entities who were members of the National Small Business Association on March 1.

“Some of you may say I’m a single member LLC, and my accountant told me I’m disregarded,” said Tidgren. “Yes, you are disregarded for tax purposes, You’re not disregarded for Corporate Transparency Act purposes, even if there’s only one owner for an LLC. You have to file this report.

“General partnerships are not required to file because you did not create your general partnership by filing a document with your secretary of state’s office. But if you are a limited partnership you had to file a document to get that liability protection. Most trusts do not, but if you’re in a state where you have to file a document with the secretary of state’s office, you have to file a report.”

The CTA rules list 23 types of entities that do not have to file reports. Those include governmental authorities, banks, credit unions, accounting firms, tax-exempt entities and others.

“If you look at this list, be very careful because not every entity that might fall into these categories is actually exempt.,” she noted. “You need to read the small business compliance guide and make sure you meet the requirements.”