I recently gave a talk to local small business owners about the Corporate Transparency Act (“CTA”) focused on the basics of the CTA: who reports, what information is reported, and when the information is reported. However, an attendee asked a very good question: as a director on the Board of several local corporations, what are my obligations to these corporations now that I know about the CTA? This question prompted this post to ensure directors are aware of their duties to the corporations they serve in the new era of the CTA.
What is the CTA?
For those that do not know, the CTA is a new federal law effective on January 1, 2024 creating a federal database where all “beneficial owners” of qualified business entities (e.g. entities that file with the Secretary of State) report personal identifying information. The CTA was intended to protect against money laundering by ensuring a database connects real people to the entities in which they own an interest (or “control”). Beneficial owners of qualifying business entities must report their information to the BOI E-Filing System, otherwise penalties, both civil and criminal, loom. For a deeper dive into the CTA and how to determine whether (i) your company is a qualifying business entity or (ii) you are a “beneficial owner,” I recommend reading this recent post from my colleague: https://wabusinesslawblog.com/beresford-booth-client-alert/
Fiduciary Duties and CTA
Directors must be aware of the fiduciary duties they owe to their corporations. For Washington corporations, directors must, among other things, “discharge the duties of a director … (a) [i]n good faith; (b) [w]ith the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) [i]n a manner the director reasonably believes to be in the best interests of the corporation.” RCW 23B.08.300(1). In performing these duties, directors are generally entitled to rely on the advice of counsel, accountants, and other experts. RCW 23B.08.300(2).
With these duties in mind, we revisit the original question: what, if anything, do directors need to do to advise their corporations about the CTA? In short, a director with knowledge of the CTA likely has an affirmative obligation to advise the corporation’s executives (e.g. president, vice president, etc.) of the CTA and the corporation’s potential obligation to report. A director with knowledge of the CTA who fails to raise the issue to the corporation risks personal liability. It is also important to note that general exculpation provisions in articles of incorporation or Washington’s Business Corporations Act would not save a director in this instance. While an exculpation provision will generally shield directors from liability for negligent actions taken in good faith, the provision will not “eliminate or limit the liability of a director for acts or omissions that involve … a knowing violation of law by a director.” RCW 23B.08.320.
In other words: directors should advise their corporations of the CTA and encourage the corporation’s executives to (i) determine whether the respective corporation has an obligation to report and (ii) if so, proceed with reporting.
For any questions regarding Directors and CTA Obligations, email me at info@beresfordlaw.com or give me a call at (425) 776-4100.