Corporate Transparency Act – Is Your Company Exempt?
The Corporate Transparency Act (CTA) was enacted as part of the Anti-Money Laundering Act of 2020 (AMLA) and places new reporting requirements on many business entities called “Reporting Companies” in an effort to expose illegal activities, including the use of shell companies to launder money or conceal illicit funds. Around 30 million small businesses will be impacted by the law. The CTA mandates the creation of a national registry that contains certain information about business entities that are formed by filing a document with a state’s secretary of state or similar office. CTA violations carry civil and criminal penalties, including imprisonment.
Effective January 1, 2024, the CTA requires Reporting Companies to disclose to FinCEN information about the company, its beneficial owners, and in some cases, the company applicant. Reporting Companies that are created or registered prior to January 1, 2024, have until January 1, 2025, to file an initial report; reporting companies created or registered after January 1, 2024 and before January 1, 2025, will have ninety days after creation or registration to file a report. Entities created on or after January 1, 2025 will have 30 days to submit the reports to FinCEN.
You should presume your business is subject to the reporting requirement unless the business falls under one of the twenty-three exemptions:
1. Securities reporting issuer - An issuer of securities that is: (a) an issuer of a class of securities registered under Sec. 12 of the Securities Exchange Act of 1934, or (b) required to file supplementary and periodic information under Sec. 15(d) of the Securities Exchange Act of 1934.
2. Governmental authority - An entity that: (a) is established under the laws of the United States, an Indian tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States, and (b) exercises governmental authority on behalf of the United States or any such Indian tribe, State, or political subdivision.
3. Bank – A bank, as defined in: (a) Sec. 3 of the Federal Deposit Insurance Act, (b) Sec. 2(a) of the Investment Company Act of 1940, or (c) Sec. 202(a) of the Investment Advisers Act of 1940.
4. Credit union- A Federal credit union or State credit union, as those terms are defined in Sec. 101 of the Federal Credit Union Act.
5. Depository institution holding company - A bank holding company as defined in Sec. 2 of the Bank Holding Company Act of 1956, or a savings and loan holding company as defined in Sec. 10(a) of the Home Owners' Loan Act.
6. Money services business- A money transmitting business registered with FinCEN under 31 U.S.C. 5330, or a money services business registered with FinCEN under 31 CFR 1022.380.
7. Broker or dealer in securities - A broker or dealer, as defined in Sec. 3 of the Securities Exchange Act of 1934, that is registered under Sec. 15 of that Act.
8. Securities exchange or clearing agency - A exchange or clearing agency, as those terms are defined in Sec. 3 of the Securities Exchange Act of 1934, registered under Secs. 6 or 17A of that Act.
9. Other Exchange Act registered entity - Any entity other than that described in exemption 1 (Securities reporting issuer), exemption 7 (Broker or dealer in securities), or exemption 8 (Securities exchange or clearing agency) that is registered with the SEC under the Securities Exchange Act of 1934.
10. Investment company or investment adviser - An entity that is: (a) an investment company as defined in Sec. 3 of the Investment Company Act of 1940, or is an investment adviser as defined in Sec. 202 of the Investment Advisers Act of 1940, and (b) registered with the SEC under the Investment Company Act of 1940 or the Investment Advisers Act of 1940.
11. Venture capital fund adviser - An investment adviser that: (a) is described in section 203(l) of the Investment Advisers Act of 1940, and (b) has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.
12. Insurance company - Any insurance company as defined in Sec. 2 of the Investment Company Act of 1940.
13. State-licensed insurance producer - An entity that: (a) is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State, and (b) has an operating presence at a physical office within the United States.
14. Commodity Exchange Act registered entity - An entity that: (a) is a registered entity as defined in Sec. 1a of the Commodity Exchange Act, or (b) is: (1) a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, each as defined in Sec. 1a of the Commodity Exchange Act, or a retail foreign exchange dealer as described in Sec. 2(c)(2)(B) of the Commodity Exchange Act and (2) registered with the Commodity Futures Trading Commission under the Commodity Exchange Act.
15. Accounting firm - A public accounting firm registered in accordance with Sec. 102 of the Sarbanes-Oxley Act of 2002.
16. Public utility - An entity that is a regulated public utility as defined in 26 USC 7701(a)(33)(A) that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.
17. Financial market utility - A financial market utility designated by the Financial Stability Oversight Council under Sec. 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Pooled investment vehicle – a pooled investment vehicle that is operated or advised by a person described in exemptions 3 (bank), 4 (credit union), 7 (broker or dealer in securities), 10 (investment company or investment adviser), or 11 (venture capital fund adviser).
19. Tax-exempt entity - Any entity that is: (a) an organization that is described in Sec. 501(c) of the Internal Revenue Code of 1986 (determined without regard to Sec. 508(a) of the Code) and exempt from tax under Sec. 501(a) of the Code, (b) an organization that is described in section 501(c) and was exempt under 501(a), but lost its tax-exempt status less than 180 days ago, (c) a political organization, as defined in Sec. 527(e)(1) of the Code, that is exempt from tax under Sec. 527(a) of the Code, or (d) a trust described in paragraph (1) or (2) of Sec. 4947(a) of the Code.
20. Entity assisting a tax-exempt entity - An entity that: (a) operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in exemption 19 above (tax-exempt entity), (b) is a United States person as defined in section 7701(a)(30) of the Internal Revenue Code, (c) is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence, and (d) derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence.
21. Large operating company - An entity that: (a) employs more than 20 full time employees in the United States, with “full time employee in the United States” having the meaning provided in 26 CFR 54.4980H-1(a) and 54.4980H-3 working on average at least 30 hours per week, (b) more than 20 full time employees are employed in the “United States” as defined in 31 CFR 1010.100(hhh), (c) has an operating presence at a physical office within the United States, and (d) filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity's IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles. For an entity that is part of an affiliated group of corporations within the meaning of 26 USC 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group.
22. Subsidiary of certain exempt entities - An entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in exemptions 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 19, or 21 set forth above.
23. Inactive entity - An entity that: (a) was in existence on or before January 1, 2020, (b) is not engaged in active business, (c) is not owned by a foreign person, whether directly or indirectly, wholly or partially, (d) has not experienced any change in ownership in the preceding twelve-month period, (e) has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12 month period, and (f) does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.
If your company doesn’t fall under one of the above exemptions, it is a Reporting Company. Penalties for noncompliance may be steep. Willingly providing false information (including false identifying documents) to FinCEN, or failing to report complete BOI information, can result in:
Fines of $500 per day, up to $10,000
Imprisonment for up to two years
Civil and criminal liability may be avoided if an individual who submitted an original, erroneous report did not knowingly submit inaccurate information and submits an updated report correcting the inaccurate information within ninety days.
FinCEN is now accepting reports and they are filed online only at: https://fincen.gov/boi. You can also find out more information about your obligations under the CTA at this same website.
Compliance with the CTA does not end with the filing of the initial report. Updates must be filed within 30 calendar days of any change in the information reported about the company or its beneficial owners. This obligation continues as long as the company remains a reporting company. Penalties can also be imposed for noncompliance with the updating requirement. So, make sure you have a procedure in place to keep track of your reported information and are aware of when updates must be filed.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.