To File a BOI or Not File a BOI, That is the Question

A Look at the Current State of Affairs of the Corporate Transparency Act

Over 2,000 years ago, a decree went out from Ceaser Augustus that all the world should be registered, so everyone went to be registered to their city. Thus starts the Christmas story setting the stage for a little town called Bethlehem to become more famous than New York, London or Paris combined. Fast forward 20 centuries later and the United States government, taking a page right out of Ceaser Augustus’ playbook, decreed that the ownership of almost every artificial entity in the U.S. should be registered with the Financial Crimes Enforcement Network (FinCEN) so the data can be entered into a new federal government database called Beneficial Ownership Secure System (BOSS) by passing what is known as the Corporate Transparency Act (CTA).  While we can only speculate why Augustus ordered the first census, FinCEN clearly stated that the purpose of the CTA is to allow the data to be accessed by law enforcement, the Internal Revenue Service, certain other agencies, and select financial services companies in order to reduce money laundering and the funding of criminal or terrorist activities through shell companies.

While those intentions are well and good, requiring an estimated 32 million entities to file a Beneficial Ownership Information (BOI) report disclosing the individual ownership of non-public companies, and the identity of the attorneys and others who formed those companies, with a centralized governmental database comes at a substantial economic cost. FinCEN estimated the aggregate burden imposed on business to be $22.8 billion in Year 1, and $5.6 billion in Year 2 given how the program would be rolled out. FinCEN doesn’t attempt to downplay the impacts either, noting in dry language only a bureaucrat could love, that “[t]he aggregate cost of this regulation is reflective of the large number of corporations and other entities that are covered in order to implement the broad scope of the CTA.”

What Does the CTA Require?
When the CTA went into effect on Jan. 1, 2024, both newly formed and previously established companies, large and small (but mainly small) were to provide certain information to FinCEN detailing: 1) “Beneficial Ownership” and 2) “Company Applicants.” The mandated reporting applies to all manner of legal entities, including corporations, limited liability companies (LLCs), partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs) and any other type of entity that is registrable with a Secretary of State’s office (or similar registrar). Certain entities, such as public companies; large private companies; public accounting firms; regulated insurance companies; registered investment companies and advisors; registered venture capital fund advisors; banks, broker-dealers and exchanges; regulated public utilities; as well as certain tax-exempt entities are exempt from the CTA. 

For non-exempt companies, the CTA requires a Beneficial Ownership Information report to be filed within 30 days of the formation of such an entity. Further, pre-existing entities (formed prior to Jan. 1, 2024) were required to file a BOI by Jan. 1, 2025. Failure to accurately file the BOI for any covered entity may result in both civil and criminal liability. Specifically, the CTA provides that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCEN, or to willfully fail to report complete or updated beneficial ownership information to FinCEN. As such, failure to provide certain required information in connection with the formation of a covered entity, which perhaps previously would have resulted (at worst) in a state-level administrative fine, will now (if found to be a violation of the CTA) constitute a federal crime subject to both federal civil penalties and potential criminal prosecution.

As such, absent the judicial intervention discussed below, all covered entities formed after Jan. 1, 2024, need to file a BOI within 30 days of formation, and all pre-existing entities formed prior to Jan. 1, 2024, were required to file a BOI by Jan. 1, 2025. For pre-existing entities, the BOI needs to disclose the “beneficial owner” of each entity, which is defined as any individual who meets at least one of two criteria: 1) exercising substantial control over the reporting company, or 2) owning or controlling at least 25 percent of the ownership interest of the reporting company.  For multi-tiered entities, it is necessary to file a BOI for each such entity until you reach the level of individual ownership or control for the lowest-tiered entity. The CTA has an excellent summary of what constitutes “beneficial ownership” or “substantial control.”

While existing entities need to disclose individual ownership or control, new entities (entities formed on or after Jan. 1, 2024), must also list the “company applicant.” In the case of a domestic reporting company, a “company applicant” is the individual who files the document that forms the entity. In the case of a foreign reporting company, a “company applicant” is the individual who files the document that first registers the entity to do business in the U.S. The rule specifies that a “company applicant” includes anyone who directs or controls the filing of the document by another. Generally speaking, the corporate officer or attorney who files, or oversees the filing of, the formation documents needs to be disclosed. The disclosure for both beneficial owners and company applicants generally includes the individual’s name, date of birth and street address along with an image of an approved identifying document, such as a non-expired passport or driver’s license.

What Do LIHTC Partnership/Operating Agreements Require?
Almost as soon as the CTA passed, language began to appear in the Low Income Housing Tax Credit Partnership/Operating agreements (LPA) requiring the general partner/managing member (GP) to comply with any CTA requirements. Of course, given that the CTA requires disclosure of individual ownership or control of every partner/member, the immediate issue for the GP was how to file an informational return without the necessary information from each party, including the limited partner/investor member (ILP). Fortunately, as previously mentioned, publicly traded companies, large financial institutions and the like are exempt from the CTA filing requirements, which help minimize the filing burden placed upon a GP for disclosing ownership of each partner as the ILP is usually exempt. However, it is critical the LPA requires each partner to provide the GP with the requisite information they need to make any such CTA filing and for the ILP to make a written representation, which the GP can rely on in the event the ILP claims to be exempt from CTA filing requirements. Finally, given that the CTA rules are new, and as seen below, in question as to their enforceability, any requirements for a GP to comply with the CTA should be limited to best efforts and not come with a host of penalties or remedies so long as the GP uses commercially reasonable efforts to comply with same and should terminate to the extent the CTA is no longer applicable.

Judicial Challenges
Of course, requiring potentially hundreds of millions of U.S. citizens to disclose ownership of corporate entities, date of birth, street address and a picture of their driver’s license to one central government database called the BOSS, which is run by the Financial Crimes Enforcement Network of the U.S. Treasury is daunting at best. While the multi-billion-dollar price tag of compliance borne by company owners is staggering, dollars are not the only cost. Loss of privacy and the centralization of so much private information in one government database meant to be used as a crime enforcement tool come at a potentially huge cost to privacy. At least that is what the plaintiffs in various judicial challenges to the CTA have claimed. 

After several cases filed in various jurisdictions did not result in much relief for corporate owners, on Dec. 3^, 2024, U.S. District Court Judge Amos L. Mazzant in the Eastern District of Texas issued a 79-page order in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.), granting a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act 31, U.S.C. § 5336 and its related Reporting Rule, 31 C.F.R. 1010.380 finding the CTA  “likely unconstitutional.” Specifically, the preliminary injunction: 1) enjoins the CTA, including enforcement of that statute and regulations implementing its beneficial ownership information reporting requirements, and, specifically, 2) stays all deadlines to comply with the CTA’s reporting requirements.

Therefore, as of Dec. 3, 2024, reporting companies were not currently required to file their beneficial ownership information with FinCEN and were not subject to liability if they failed to do so while the preliminary injunction remained in effect, but could still voluntarily file if they wanted to. However, that reprieve did not last long. The Department of Justice, on behalf of the Department of the Treasury, quickly filed a Notice of Appeal and on Dec. 23, 2024, the Fifth Circuit issued an order granting a stay of the December 3 nationwide injunction against the CTA.

The ruling on December 23^rd immediately reinstated the CTA’s beneficial ownership reporting requirements, just eight days before the original deadline leaving practitioners and business owners scrambling between Christmas and New Years, (which also happened to be Hanukkah in 2024), to comply with the CTA and file millions of BOI reports. Thankfully, in the spirit of the season, while under no obligation to do so, FinCEN extended the December 31^st filing deadline to January 13^th to presumably not completely disrupt the holiday season.  But wait, there’s more.

Where Things Stand Today
While that seemed to be the end of the matter, as company owners and counsel sipped hot cocoa with visions of filing BOI reports dancing in their heads, on December 26^th the 5^th Circuit reversed itself, and reinstated the Texas Top Cop Shop case injunction (that is as fun to write as it is to say). So, what does that mean for today? Until the underlying issues are finally settled, no CTA filings are currently required.  That being said, companies are free to voluntarily file BOI reports in anticipation of a court eventually ruling the CTA as enforceable, thereby avoiding a short timeframe to comply. The risk, however, is no one is sure which portions of the CTA may be saved and which may no longer be applicable or modified. As such, companies who already filed a BOI may need to amend the same in the event the CTA requirements are judicially changed or may have filed a report disclosing private information that ultimately did not need to be filed at all. Further, given this pause on the CTA has occurred during a transition in the presidency, there is a chance the new administration may completely do away with the CTA regardless of how the courts rule. 

Conclusion
This brings us back to our initial quandary: To BOI or not to BOI, that is the question. We at Nelson Mullins are advising our clients to pause filing efforts until the dust settles on this once and for all, or at least settles for the fourth time. Until then, we will keep an eye on the courts, the administration and the FinCEN while at the same time resting easy that they are certainly keeping an eye on us.