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Author: Cath Ariola

Nationwide Injunction on CTA Reporting Regulation: What It Means for Businesses

Posted on by Cath Ariola

BREAKING – Motion to Stay – Pending Response from Fifth Circuit

UPDATE: Originally anticipated to respond by 12/16, but now should be soon, and by 12/27.

Court order on removing preliminary injunction could be resolved any day, and likely before 12/27. Read the court update here: Texas Top Cop Shop v Garland et al (Motion to Stay 12-12-2024)

In a landmark decision, the U.S. District Court for the Eastern District of Texas has issued a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (CTA) in the case Texas Top Cop Shop v Garland et al. (case 4:24-cv-00478, December 3, 2024). This ruling could turn into permanent, significant implications for small businesses across the country, as the court questions the constitutionality of the Corporate Transparency Act (CTA) and its impact on business operations. On December 5, just two days after the ruling, the U.S government filed an appeal to the U.S Court of Appeals for the Fifth Circuit against the preliminary injunction.

An important fact to take away from the injunction is that the CTA was not ruled unconstitutional and is not necessarily gone for good.

Nationwide Impact of Injunction on CTA Reporting

Although the plaintiffs called for the injunction to apply only to them, the Court ultimately decided that the preliminary injunction be applied nationwide, explaining that the broad impact of the CTA calls for uniform relief. Approximately 32.6 million businesses are affected, unlike the previous Alabama District Court ruling in March of 2024 that only affected the plaintiffs. 

Guidance for Businesses and Professionals

Many business owners and advisors are now questioning what their next steps should be. Here are a couple of possibilities: 

  1. Continue Preparation:

    Some might decide to continue gathering beneficial ownership information without filing, to be prepared if the CTA is reinstated. Determining beneficial owners and substantial control—and gathering the necessary information—is a time-intensive process. Pausing these efforts, especially with traditional year-end busy seasons for advisors approaching, may not be viable. If the preliminary injunction is overruled in the last week of December, business owners and professionals could be in a mad scramble to get everything and filed in a timely manner. FinCEN’s filing system may even experience issues with the volume of reports trying to be filed. Alternatively, if the preliminary injunction was overturned in February 2025 for instance, all reports previously due January 1, 2025 could be due immediately upon the overturn of this injunction – leaving FinCEN or Congress with the opportunity but no guarantee of offering filing deadline relief.

  2. Pause and Monitor:

    Others may decide to wait for further developments before continuing preparation of Beneficial Ownership Information Reports. If the CTA is ultimately ruled unconstitutional and not replaced with a modified version of the law by Congress, ceasing work could avoid unnecessary effort and expenditure. Ultimately, this approach only makes sense however if the amount of work required is manageable if a last-minute scramble scenario arises.

No matter how you proceed, proactive communication with clients and other beneficial owners is critical. As with any compliance issue, your clients rely on you to keep them informed about compliance changes and how they affect them. Whatever happens next, it’s good to remind your clients to amend operating agreements that are out of date, or any other maintenance that may have been discovered during this information gathering and review process.

Possible Future Directions

The path forward for the CTA is uncertain and could take several directions:

  1. Delay:

    Multiple courts have rejected requests for injunctions, holding that the Corporate Transparency Act is constitutionally defensible. If ultimately the CTA is sustained as current legal actions play out, it is possible that FinCEN or Congress could institute a short delay or extension of deadlines prior to enforcing compliance.

  2. State-Level Action:

    Some states may consider creating their own Beneficial Information Reporting systems (for instance – New York’s new law that has a 1/1/2027 reporting due date), creating a modified state-level filing system.

  3. Repeal and Redo:

    If the CTA as currently enacted is ultimately held to be unconstitutional, it is highly likely that Congress could enact a modified and constitutionally permissible version of the law. The U.S. faces pressure from the international banking system to have sufficient beneficial ownership rules in place (similar to most other developed nations), and it seems probable that some modified version of the CTA would be enacted if the current version was ultimately held to be unconstitutional.

  4. Modified Filing Requirements:

    Given the impact of the CTA on small businesses in particular, it is possible that Congress enacts additional exemptions to apply to a larger swath of “Main Street” small businesses. Other possible changes could include turning the reporting into an annual filing requirement and extending the deadline timelines for updates and new companies.

Conclusion

The nationwide preliminary injunction against the CTA is a significant development, introducing uncertainty for small businesses and advisors. The CTA has not ultimately been determined as unconstitutional and its requirements may be reinstated depending on legal outcomes. Businesses should prepare for all scenarios, including a potential overturn of the injunction and compressed filing deadlines.

As the legal challenges progress, staying informed and ready to adapt is crucial. The future of Beneficial Ownership Information Reporting remains uncertain, and further updates will help guide the path forward for businesses and advisors.

Obtaining EINs for Single-Owner Disregarded LLCs to Enhance Privacy

Posted on by Cath Ariola

With the upcoming deadline for millions of Beneficial Ownership Information (BOI) reporting requirements, getting an Employer Identification Number (EIN) for your single-member, disregarded LLC is a proactive step to enhance privacy and reduce the risks associated with reporting a Social Security Number (SSN) as the entities tax ID number.

While using an SSN may be practical for many single-member LLCs in the past for other obligations, BOI reporting could introduce new privacy concerns. Here’s why obtaining EINs for single-owner disregarded LLCs can be a smart choice to protect personal information in this evolving regulatory landscape. 

The Privacy Risks of BOI Reporting

For years, single-member LLCs classified as disregarded entities for tax purposes could use the owner’s SSN (or an EIN if owned by another entity) on tax forms and financial documents. However, the BOI reporting requirement, which mandates that entities report their beneficial owners FinCEN, introduces additional privacy considerations. This new federal database could potentially face issues, including database breakdowns or data breaches, especially during the peak filing period at year-end when millions of entities submit reports. 

Relying on your SSN for BOI reporting in this new system could be risky, as it exposes your most sensitive personal information to potential leaks. Using an EIN instead of an SSN could limit the exposure of your SSN and enhance your privacy protection. 

Benefits of Using an EIN for BOI Reporting

  1. Enhanced Privacy and Security

An EIN protects your SSN from being entered into the FinCEN database. As the EIN is tied to your business, it creates a layer of separation between personal and business information, reducing the risk of identity theft if any information gets exposed. 

  1. Lower Risk During High-Volume Reporting

With millions of entities expected to file BOI reports at year-end, FinCEN’s database could face scaling issues, as this new system likely hasn’t been fully tested under such heavy demand. Using an EIN minimizes the risk of your personal SSN being caught up in potential system glitches, data breaches, or other issues. 

  1. Compliance with Evolving Regulations

As privacy regulations expand, having an EIN could make compliance with future requirements easier for single-member LLCs. 

How to Obtain an EIN for Your Single-Member LLC

Obtaining an EIN is simple, and the process can be completed online through the IRS in a few minutes. Here’s a quick guide: 

  1. Determine Eligibility: You must have a valid Taxpayer Identification Number (e.g., Social Security Number or Individual Taxpayer Identification Number) to apply. Also, only those in the U.S. or U.S. territories can apply online. 
  2. Complete IRS Form SS-4: If applying online, you don’t need to submit this form, but having it filled out will guide you through the questions. If mailing or faxing your application, you’ll need to submit Form SS-4. 
  3. Choose an Application Method:
    Online (recommended): The IRS’s online application system is the quickest way to obtain an EIN and provides an EIN immediately upon completion.
    Mail: Send Form SS-4 to the IRS, and you’ll receive your EIN by mail in about 4-6 weeks.
    Fax: Fax Form SS-4 to the IRS, and you should get your EIN within 4 business days via fax. 
  4. Answer IRS Questions: The application will ask about your business structure (e.g., sole proprietor, LLC, corporation), business activities, and reason for requesting an EIN.
  5. Receive Your EIN:
    If applying online, you’ll receive your EIN immediately.
    For mail or fax applications, the IRS will send your EIN by mail or fax in the given timeframe. 
  6. Keep the EIN Confirmation: Once you receive your EIN, save the confirmation letter or document. 

Final Thoughts on Getting EINs for Single-Owner Disregarded LLCs

Obtaining an EIN is a straightforward step that provides added privacy and security for single-member LLCs owned by individuals, especially in light of new BOI reporting requirements. By using an EIN instead of an SSN, business owners can better protect their personal information, reduce risk, and ensure smoother compliance with evolving regulatory requirements. Remember – entities formed in 2024 have 90 days from formation to file their initial BOI Report. New entities in 2025 and on only have 30 days. When applying for an EIN by mail, take note of the prolonged time it takes to receive. It will not change the initial report deadline.  

In an age of growing privacy concerns, having an EIN isn’t just a practical measure; it’s a valuable asset for safeguarding your entities — and your personal privacy.

What Do Professionals Need to Know Before the CTA Deadline?

Posted on by Cath Ariola

As the year-end approaches, businesses across the United States are racing against time to comply with the Corporate Transparency Act (CTA). With less than 34 days left until the CTA deadline, business owners and accountants need to understand the requirements and take immediate action to avoid significant fines and penalties.  

Here’s what you need to know to ensure compliance with the CTA. 

What is the Corporate Transparency Act (CTA)?

The CTA mandates that most U.S.-based businesses, including LLCs, corporations, and limited partnerships, submit a Beneficial Ownership Information (BOI) report to the Financial Crimes Enforcement Network (FinCEN). This report identifies individuals who own or control the company, known as beneficial owners.  

The purpose of this legislation is to enhance transparency and combat illegal activities such as money laundering, tax evasion, and the misuse of shell companies. 

Why the CTA Deadline Matters

Despite its broad impact, many businesses remain unaware of the CTA’s filing requirements. Non-compliance can result in substantial fines, up to $591 per day. With about 80% of businesses yet to submit their BOI reports, the risk of penalties is significant. 

Accountants and CPAs have also been slow to act, often due to uncertainty about the law’s enforcement. However, with the deadline fast approaching, it is imperative for accountants to assist their clients in meeting the requirements in time. 

What You Need to Know About BOI Reporting

The BOI report requires detailed information about the company and its beneficial owners, including personal identification numbers, such as a Driver’s License or passport, images of IDs, birthdates, and home addresses. For many business owners, this level of detailed reporting is unprecedented. 

For accountants, the task of collecting and managing this sensitive data can be overwhelming, particularly for those handling multiple clients. Additionally, any changes in beneficial ownership must be reported to FinCEN within 30 days, adding another layer of complexity. 

FinCEN’s Role in Educating Businesses

Throughout the year, FinCEN has attempted to raise awareness about the CTA and BOI reporting requirements, although many believe it isn’t enough. They have hosted live events, attended major industry conferences, and launched national marketing campaigns to inform businesses. Despite these efforts, many businesses still lack awareness of the new law and its implications. 

Practical Steps to Ensure Compliance

  1. Educate Yourself and Your Team:
    Understand the BOI reporting requirements and educate your team about the importance of compliance. 

  2. Gather Necessary Information:
    Collect the required details of beneficial owners well in advance of the deadline. 

  3. Utilize Technology:
    Consider using compliance software to streamline the reporting process and ensure data security.  

The Importance of Filing Even If Details Are Missing

If a beneficial owner is uncooperative or delays providing information, it’s still advisable to file the report by the CTA deadline. You can always submit a corrected report once the necessary information is obtained. Filing on time demonstrates your commitment to compliance and may mitigate the risk of penalties. 

Additionally, if an individual willfully fails to provide the required information, the responsibility and potential penalties are likely to fall on the non-compliant individual, not the reporting company per FinCEN FAQs. 

Conclusion

With the CTA deadline rapidly approaching, it’s essential for business owners, legal professionals, and accountants to act now. Understand the requirements, gather the necessary information, and utilize technology to streamline the process. By ensuring timely compliance, you can avoid hefty fines and contribute to a more transparent business environment. 

How to Solve the Problem of Uncooperative Beneficial Owners

Posted on by Cath Ariola

Complying with Beneficial Ownership Information (BOI) reporting requirements is essential for transparency and regulatory adherence. However, it can be challenging when beneficial owners are uncooperative.  

This blog explores strategies to handle uncooperative beneficial owners, ensuring compliance and mitigating potential risks. 

Understanding the Challenges

Beneficial owners – individuals who have significant control over or benefit from a company – are vital in BOI reporting. However, some may hesitate or refuse to provide the necessary information due to privacy concerns, misunderstanding the requirements, or general unresponsiveness or unwillingness to comply. 

Strategies for Dealing with Uncooperative Beneficial Owners

Clear Communication 

Start by educating beneficial owners about the importance of BOI reporting and the legal requirements. Provide clear, concise information on why cooperation is crucial. Be transparent about how their information will be used and protected. Address any concerns they may have about privacy and data security. 

Incentivize Compliance 

Highlight the benefits of compliance, such as avoiding astronomical penalties and contributing to corporate transparency. Send regular reminders about upcoming deadlines to ensure they understand the urgency of providing their information. 

Escalation Procedures 

If initial attempts at communication fail, escalate the matter within your organization. Involve higher management or legal advisors to emphasize the seriousness of the issue. Consider seeking external mediation or legal advice if the owner continues to be uncooperative. 

File the Report Regardless 

If an owner does not provide the required information by the end of the due date for the entity, it is advisable to file the report anyway with the information that is assessable. Once the owner cooperates, you can always file a corrected report to include the information.  

Consequences for Non-Compliance 

Inform uncooperative beneficial owners about the legal consequences of non-compliance. Emphasize that the responsibility and potential penalties will likely fall on the unresponsive individual rather than the reporting company. Keep thorough records of all communication and efforts made to obtain the necessary information. This documentation can serve as evidence of your proactive approach in case of an audit or legal inquiry. 

Attacking Compliance Head-On 

Dealing with uncooperative beneficial owners can be challenging, but with the right strategies, it is possible to ensure compliance and mitigate risks. Clear communication, incentivizing compliance, and understanding the legal implications are essential steps in this process. Remember, it may be better to file an incomplete report and update it later than to miss the deadline entirely. Stay proactive and keep detailed records of your efforts to demonstrate your commitment to regulatory compliance. 

The Impact of BOI Reporting for Small Businesses

Posted on by Cath Ariola

In an era of increasing regulatory scrutiny, small businesses face a myriad of compliance requirements. One new requirement is the Beneficial Ownership Information (BOI) reporting under the Corporate Transparency Act (CTA).  

This regulation, overseen by the Financial Crimes Enforcement Network (FinCEN), mandates that businesses disclose information about their beneficial owners. While the goal is to enhance transparency and combat illicit activities such as money laundering and tax evasion, the implications for small businesses are often questioned. This blog explores the impact of BOI reporting for small businesses, highlighting both the challenges and opportunities. 

Understanding BOI Reporting for Small Businesses

Under the CTA, businesses must report the following information about their beneficial owners to FinCEN: 

  • Full legal name 
  • Date of birth 
  • Current residential or business address 
  • A unique identifying number from an acceptable identification document (e.g., passport or driver’s license) 
  • An image of the identification document

This requirement applies to all entities that are formed in the United States or are registered to do business here, with some exceptions. Small businesses, in particular, need to be aware of these obligations to avoid penalties and ensure compliance. 

Challenges for Small Businesses

Administrative Burden 

One of the primary challenges for small businesses is the administrative burden associated with BOI reporting. Unlike larger corporations, small businesses often lack dedicated compliance teams or resources. The process of gathering and verifying the necessary information can be time-consuming and resource intensive. 

Compliance Costs 

Compliance with BOI reporting requirements can incur significant costs for small businesses. These costs include not only the time and effort involved in reporting but also potential legal and consulting fees. Small businesses may need to hire external advisors to ensure that they are meeting all regulatory requirements, adding to their financial burden. 

Risk of Penalties 

Failure to comply with BOI reporting requirements can result in severe penalties, including draconian fines of up to $591/day the report goes unfiled and potential criminal charges. Small businesses, which may already be operating on thin margins, cannot afford to take this risk lightly. 

Opportunities for Small Businesses

Streamlined Processes 

Once established, BOI reporting processes can be integrated into existing compliance frameworks, potentially streamlining other regulatory reporting requirements. Small businesses that invest in robust compliance systems may find that these systems can be leveraged for multiple purposes, improving overall efficiency. 

Potential for Simplified Reporting 

The introduction of FinCEN Identifiers (FinCEN IDs) offers a potential simplification of the reporting process. A FinCEN ID allows individuals to submit their identifying information once and use the ID for all subsequent reports they need to be reported on. For small businesses, this can reduce the repetitive nature of reporting and simplify ongoing compliance efforts. 

Tackling Compliance 

BOI reporting under the Corporate Transparency Act presents both challenges and opportunities for small businesses. While the administrative burden and compliance costs can be significant if not managed correctly, the benefits of enhanced transparency and trust can be substantial.  

By preparing early, leveraging technology, and seeking professional advice as needed, small businesses can navigate these requirements effectively and turn compliance into a competitive advantage. 

For more detailed information on specific aspects of BOI reporting, check out our related articles: 

Do I Include My Spouse as a Beneficial Owner? (LLC as a Husband and Wife in a Community Property State)

Posted on by Cath Ariola

When setting up a Limited Liability Company (LLC) or other company in a community property state, it’s important to understand the implications for Beneficial Ownership Information (BOI) reporting. Failing to include your spouse as a beneficial owner may lead to compliance issues. 

Read on to understand the necessary steps and considerations to ensure that your entities comply with BOI reporting requirements.

Which States Are Community Property States?

Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, most property acquired during the marriage is considered jointly owned by both spouses, regardless of who purchased it. This rule includes newly formed LLCs by a married individual.

The Importance of Including Your Spouse as a Beneficial Owner

The Corporate Transparency Act (CTA) requires entities, including LLCs, to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Beneficial owners are individuals who directly or indirectly exercise substantial control over the entity or own at least 25% of the ownership interests.

For entities in community property states, both spouses typically have equal ownership over the property. Therefore, if one individual has 25% ownership interest then they must both be reported as beneficial owners. A newly issued FAQ from FinCEN confirmed that community property considerations should not be ignored. The FAQ reads:

“D. 18. If one spouse has an ownership interest in a reporting company, is the other spouse also considered a beneficial owner if the reporting company is created or registered in a community property state?

Possibly. Whether State community property laws affect a beneficial ownership determination will depend upon the specific consequences of applying applicable State law. If, applying community property State law, both spouses own or control at least 25 percent of the ownership interests of a reporting company, then both spouses should be reported to FinCEN as beneficial owners unless an exception applies.”

Given the above FinCEN guidance, neglecting to include your spouse as a beneficial owner can result in non-compliance with BOI reporting requirements, potentially leading to significant fines and penalties. It is highly recommended to consult with an attorney or CTA compliance expert if you are married and live in a community property state.