Corporate Transparency Act Part III; Exemptions & Reporting Requirements. DOES YOUR COMPANY HAVE TO REPORT?

June 28, 2023  |  Carole Clark Isakson

This article is one in a continuing series of articles on the soon to be effective Corporate Transparency Act. Many entities will need to comply with reporting obligations under the Act or face significant penalties. Read all of these articles on the firm website.

The Corporate Transparency Act (CTA), signed into law in January 2021, requires certain companies to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The purpose of this legislation is to increase transparency in the corporate sector and help combat illegal activities such as money laundering, terrorism financing, and tax evasion.

The CTA requires that certain entities, known as “reporting companies,” provide information to FinCEN. Reporting companies are defined as any corporation, limited liability company, or other similar entity that is created by filing a document with a secretary of state or similar office under the laws of a state or Indian tribe, or a similar entity formed under the laws of a foreign country and registered to do business in the United States.

The information that must be included has been covered in prior blogs and will be addressed in greater detail in future blogs. Our focus here is on WHO must report – not every entity must comply with the CTA. In fact, there are 23 categories of exemptions from the definition of “reporting company.” These exemptions include “large operating” companies and entities that are already subject to disclosure obligations (lending institutions, for example). Whether or not an entity is exempt is determined on an annual basis, so an entity could be exempt for one year, and required to report the next year.

In addition to exempting reporting by entities that are already heavily regulated and making disclosures, the CTA also provides that certain “large operating” entities need not report. A “large operating” company must:

1. Have a physical office in the US, and

2. Have more than 20 full time employees, and

3. Report at least Five Million Dollars in gross receipts on its most recent federal tax return

The 23 types of entities exempt from the definition of “reporting company” are:

1.            Securities reporting issuer;

2.            Governmental authority;

3.            Bank;

4.            Credit union;

5.            Depository institution holding company;

6.            Money services business;

7.            Broker or dealer in securities;

8.            Securities exchange or clearing agency;

9.            Other Exchange Act registered entity;

10.         Investment company or investment adviser;

11.         Venture capital fund adviser;

12.         Insurance company;

13.         State-licensed insurance producer;

14.         Commodity Exchange Act registered entity;

15.         Accounting firm;

16.         Public utility;

17.         Financial market utility;

18.         Pooled investment vehicle;

19.         Tax-exempt entity;

20.         Entity assisting a tax-exempt entity;

21.         Large operating company (see below);

22.         Subsidiary of certain exempt entities; and

23.         Inactive entity.

One of the notable exemption categories is for larger operating companies. A large operating company is defined as a company that has more than 20 employees, more than $5 million in gross receipts or sales made in the U.S. as reported on prior year Federal income tax returns, and a physical presence in the U.S. If a company meets these requirements, it is exempt from reporting under the CTA.

Certain tax-exempt entities are also exempt from reporting under the CTA. To qualify for the tax-exempt entity exemption, an organization must be:

1. Exempt from taxation under Section 501(a) of the Internal Revenue Code (IRC);

2. An organization described in Section 501(c) of the IRC which includes entities such as charitable, educational, religious, and scientific organizations; and

3. Registered and in good standing with the IRS. Some entities considered to be charitable entities, or which operate as “non-profits” will still need to comply with the CTA.

Note that for reporting purposes a wholly owned subsidiary will be exempt from reporting if its parent company is exempt. The same analysis does NOT apply to affiliates.

Barna, Guzy & Steffen, Ltd.’s corporate law practice group continues to closely monitor developments in this area. If you believe you or your business may be impacted by these requirements, one of our knowledgeable corporate attorneys would be happy to navigate you through this process. Please contact BGS attorneys Carole Clark Isakson or Scott M. Hagel for assistance.