Key Updates to the Federal Corporate Transparency Act
On January 1, 2024, the Federal Corporate Transparency Act (CTA) went into effect. This law affects mostly small businesses by requiring them to report beneficial ownership or those that have substantial control over the organization to the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN). Under the law, the entities that must report are entities formed in the United States or registered to do business in the United States, entities that are a corporation or limited liability company, and entities that have 20 or fewer full-time employees, and $5 million or less in annual revenue for the prior year.
FinCEN has frequently updated its rules on the reporting process and reporting obligations since January 1, 2024, to refine the reporting process and to close loopholes in the original rules. On July 24, 2024, FinCEN released a new FAQ guide with key changes to the reporting process.
Wholly Owned Subsidiaries of CTA Exempt Reporting Companies
FinCEN clarified the rules regarding subsidiaries of entities that are exempt from reporting under the corporate transparency act. Only entities that are wholly owned by the exempt reporting company are exempt from reporting. For example, if an exempt reporting company holds 100% of all the membership interest in an LLC that would otherwise be required to report, the LLC is exempt from reporting because it is wholly owned. If the exempt reporting company holds less than 100% in the LLC required to report, that LLC must now report, even if the other membership interest is held by an exempt reporting company individual (CEO or CEO’s trust) or other exempt reporting company entity.
Dissolved Entities
Dissolved entities may now be required to report depending on when they ceased to exist. Any entity that would be required to report, but was created and then dissolved prior to January 1, 2024, is not required to report. Entities that were dissolved at any time in 2024 are required to report regardless of when they were created, even if they ceased to exist before their initial report was due.
Homeowners Associations
Under the updated rules, Homeowners Association (HOA) created prior to January 1, 2024, may now be required to report. If the HOA was created by filing a document with the Secretary of State, it must report. Because of the nature of HOAs, there could be multiple beneficial owners, all of whom could be the members of the board. Only HOAs that have 501(c)(4) IRS exemption are exempt from reporting.
Non Profit Organizations with IRS Tax Exemption
Tax exempt entities, those with 501(c)(3), 501(c)(4), or 501(c)(6) exemptions, are one of the 23 exempt companies that are not required to report. However, FinCEN has added guidance that non profit organizations created January 1, 2024 or after that will become tax exempt are now required to report since they do not have IRS exemption at time of creation. This means that non profit organizations will be filing an initial report upon their creation, and then filing an updated report as a newly exempt entity within 30 days of receiving their IRS tax exempt determination.
Beneficial Owner Updates
FinCEN has provided additional guidance on who is a beneficial owner. Under the new guidelines, a beneficial owner is:
- A person that owns 25% or more of the entity;
- The entity’s senior officer (president, manager, general counsel, CEO, CFO, COO, or any other officer who performs a similar function);
- Individuals that have authority to appoint or remove officers, directors, or managers; or
- Any individual that is considered an important decision maker or has consent rights.
It is important to note that the updated guidance on who is a beneficial owner is designed to cast a wider net as the foregoing is a not an exhaustive list of who is a beneficial owner.
When are Reports Due?
For entities created prior to January 1, 2024, all reports are due by December 31, 2024. For entities created between January 1, 2024, and December 31, 2024, reports are due within 90 days of their creation. For entities created January 1, 2025 or after, reports are due within 30 days of creation.
Don’t wait until the last minute to get your affairs in order. Edward McMurray represents clients in Levin Ginsburg’s Corporate Law Practice and has extensive experience with the Corporate Transparency Act and advising associations and non-profit at all stages and of all sizes. Should you have any questions about the Corporate Transparency Act, if you are required to report, or other issues affecting your non-profit or association, please contact Edd through our website.
