Under the CTA, an applicable company is required to report information concerning their beneficial owners (a) within 90 days for companies formed after January 1, 2024, or (b) by January 1, 2025, for companies that existed prior to January 1, 2024. The reason we are bringing this alert to our readers now is that the January 1, 2025 deadline is rapidly approaching. The act imposes significant penalties for non-compliance. It is, therefore, essential to determine who must comply with the CTA’s requirements prior to the looming deadline.
Subject Entities
Business entities that are required to report under the CTA (referred to as “reporting companies”) are: (a) corporations, limited liability companies, and other business entities, which are created in the United States by the filing of a document with a secretary of state or similar officer within a state, and (b) foreign companies that are authorized to do business in the United States by having made a similar filing. General partnerships, sole proprietorships and joint ventures are not required to report.
The CTA exempts 23 types of entities from the reporting requirements, including publicly traded companies, banks, securities brokers or dealers, insurance companies, accounting firms, tax-exempt entities, large operating companies and subsidiaries of certain exempt entities.
It is anticipated that the “large operating company” exemption will be particularly important for companies to assess. Under this exception, a company is exempt from reporting if that entity employs more than 20 full-time employees in the United States, has an operating presence at a physical office within the United States, and the entity filed a federal income tax return for the previous year demonstrating more than $5,000,000 in gross receipts or sales. If a company is exempt, it is not required to take any action with respect to the CTA.
Based on the above, it may be that some medical groups would fall under the requirements of the act. Indeed, according to a June 11, 2024 article on the Cooperative of American Physicians website, “the CTA will apply to most small medical practices that are incorporated.”
Required Reporting
Reporting companies are required to provide certain information regarding their beneficial owners. Beneficial owners are the individuals who, directly or indirectly: (a) exercise substantial control over a reporting company, or (b) own or control at least 25 percent of the ownership interests of a reporting company. Individuals with substantial control include senior officers, such as the president, chief executive officer, chief financial officer, general counsel, individuals with the ability to appoint or remove certain senior officers, important decision-makers or other individuals who have substantial control over the reporting company.
A reporting company is required to report to FinCEN for each beneficial owner their name, date of birth and residential address. A copy of each beneficial owner’s United States passport or state-issued driver’s license or identification document must also be provided. Companies can complete a CTA filing by visiting the FinCen website. The applicable Code of Federal Regulations outlining the requirements under the CTA can be found at 31 CFR § 1010.380.
Potential Penalties
The willful failure to comply with the CTA reporting requirements (or the willful provision of false or fraudulent information) may result in civil penalties of up to $500 for each day the violation continues and/or criminal penalties of up to two (2) years’ imprisonment and a fine of up to $10,000. Senior officers of an entity that fails to complete its reporting requirements may also be held personally accountable for such failure.
Constitutional Questions
Now, having said all this, we must ask: is the CTA actually constitutional? The act has faced several legal challenges in multiple jurisdictions. On March 1, 2024, a federal judge in Alabama issued an order declaring the CTA unconstitutional; however, the government is appealing that decision.
A major blow to the CTA was handed down on December 3 of this year. According to a December 5 article on the National Law Review website, a federal court in Texas has “issued a sweeping order prohibiting the federal government from enforcing the CTA anywhere in the country.” The court in Texas Top Cop Shop, Inc., et al. v. Garland, et al., Case No. 4:24-cv-478 (E.D. Tex.) held that the CTA is “likely unconstitutional” and that its implementation would irreparably harm reporting companies if they were forced to comply. Significantly for our readers, the Texas court enjoined the CTA’s enforcement nationwide, specifically stating that (a) neither the act nor its related regulations may be enforced, and (b) reporting companies need not comply with the CTA’s January 1, 2025 reporting deadline.
The court determined that Congress exceeded its legislative powers when it enacted the CTA. In the court’s view, upholding the CTA and its requirement that most entities created or registered under state law must continually disclose information to the federal government “would be to rubber-stamp a new form of federal power” that would “threaten the very fabric of our system of federalism.”
For those who had been under the gun of the CTA with the January 1, 2025 deadline approaching, the court’s decision is no doubt welcome news. However, the December 3 ruling may not be the last word. The decision acts only as a preliminary injunction, meaning the court could revisit and revise its ruling at a later date. In addition, we would expect the government to appeal this decision to the U.S. Fifth Circuit Court of Appeals in New Orleans. Depending on what happens there, the case could eventually find its way before the U.S. Supreme Court. In the interim, and in absence of a higher court’s ruling in this matter, medical groups will not be required to comply with the CTA’s reporting requirements—and that will no doubt be seen by many of our readers as an early, if tenuous, holiday gift.