Beware Current and Coming State Law Corporate Transparency Requirements
The federal Corporate Transparency Act (the “CTA”) has been amended so as to apply only to non-US companies (those formed outside the US under non-US law) and non-US beneficial owners of such companies. This effectively eviscerates its effect on US companies and US owners, making the CTA irrelevant for many companies previously scrambling to prepare for its beneficial ownership disclosure mandates. However, some states are considering their own “mini-CTA” provisions under their business formation laws.
New York has already adopted a “mini-CTA” applicable to LLCs formed or qualified to do business in the state that becomes effective January 1, 2026. The defeat of the CTA at the federal level may lead to a patchwork of laws across the states, more cumbersome and time-intensive than the single, federal CTA.
The CTA was the subject of a highly unusual legal back-and-forth – its effectiveness was enjoined by a federal district court during the pendency of the proceedings on its constitutionality. A Texas district court enjoined the effectiveness of the CTA during the term of the case, challenging its constitutionality. A motions panel of the Court of Appeals overturned that injunction, but the panel set to hear the actual merits of the appeal overruled the motions panel, reinstituting the injunction. The Supreme Court allowed enforcement of the CTA, but a separate injunction had taken effect through another district court case. The Department of the Treasury then revised the rule to exclude US companies and persons from its scope.
However, in late 2023, the State of New York adopted a “mini-CTA” applicable to LLCs formed in the state or qualified to operate there. Note: this mini-CTA applies only to LLCs and not corporations.
This transparency requirement will go into effect, and initial filings must be made by January 1, 2026. The NY law requires reporting of beneficial owners, defined to mean any natural person who, directly or indirectly, either through any contract, arrangement, understanding, relationship, or otherwise exercises substantial control over the reporting company or owns or controls 25% or more of the ownership interests of the reporting company. The NY law incorporates the many exemption categories applicable to the federal CTA, including regulated financial institutions and companies with more than 25 employees and $5 million in gross receipts.
A number of other states are actively considering business entity transparency requirements. Other states, such as California, Maryland, and Massachusetts, are actively considering or reviewing proposed legislation for their own CTA-like regulations. These could vary in terms and definitions and subject companies to a patchwork of transparency obligations and filings; without coordination, the second evolution of corporate transparency could prove more intrusive and time-consuming than the first.
The District of Columbia and South Dakota have already implemented beneficial ownership information reporting requirements for entities formed in or qualified to do business in the state. These vary from the provisions of the CTA in many respects, as they did not develop from those provisions, unlike the regulations currently being contemplated in a number of states.
Business owners should be careful to monitor their beneficial ownership reporting obligations at the state level (as well as in Washington, DC, and US territories, where applicable).
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.