What Associations Need to Know About the Corporate Transparency Act
THE CORPORATE TRANSPARENCY ACT (CTA) requires action by most incorporated entities. This new federal legislation tasks the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, with collecting beneficial ownership information (BOI) from certain U.S. companies. The legislation became effective January 1, 2024, and arose over concerns about bad actors setting up corporate structures to conceal financial crimes, such as money laundering, tax fraud, and financing terrorism. This article provides a high-level summary of the CTA’s requirements. It is not intended, and should not be relied upon, as legal advice. Please consult your own legal or accounting professionals for guidance pertaining to your circumstances.
Scope of the CTA
Every entity that has been formed or registered to do business via a filing in a U.S. state will be required to file a BOI report, unless an exemption applies. There are 23 different exemptions to the CTA – mostly benefitting tax-exempt entities, large companies, or those in highly regulated industries where similar reporting obligations generally already exist.
Some relevant exemptions include:
- unincorporated sole proprietorships;
- general partnerships;
- large entities with more than 20 full-time employees, more than $5 million in gross receipts or sales reported on its prior year’s tax return (including consolidated subsidiaries), and a U.S. physical office;
- publicly traded companies;
- tax-exempt entities; and
- inactive entities.
Tax-Exempt Entity Exemption
Most professional and trade associations are organized as tax-exempt entities. FinCEN’s guidance explains that an entity qualifies for the tax-exempt entity exemption if any of the following four criteria apply:
1) The entity is an organization that is described in section 501(c) of the Internal Revenue Code of 1986 (Code) (determined without regard to section 508(a) of the Code) and exempt from tax under section 501(a) of the Code.
2) The entity is an organization that is described in section 501(c) of the Code, and was exempt from tax under section 501(a) of the Code, but lost its tax-exempt status less than 180 days ago.
3) The entity is a political organization, as defined in section 527(e)(1) of the Code, that is exempt from tax under section 527(a) of the Code.
4) The entity is a trust described in paragraph (1) or (2) of section 4947(a) of the Code.
Many professional and trade associations likely fit within criteria #1 above, as an organization described in section 501(c) of the Code and exempt from tax under section 501(a) of the Code. For those entities, the exemption for tax-exempt entities likely applies.
This exemption also carries forward to a subsidiary entity that is controlled or wholly owned, directly or indirectly, by the tax-exempt entity. Thus, if your association has a for-profit affinity entity that is wholly owned by the tax-exempt entity, that for-profit entity should qualify for exemption.
When is the Report Due?
Assuming that an exemption does not apply, the deadline for filing a BOI report depends on when the entity was formed.
- Existing entities (formed prior to 2024) have until the end of 2024 to file the initial BOI report.
- Entities formed during 2024 have 90 days from the date of formation.
- Entities formed after 2024 will have 30 days from the date of formation.
- Any changes to the reported information must be reported within 30 days.
Content of the Report
BOI reports must include certain identifying information about the reporting entity and each individual who has at least 25% ownership (direct or indirect) or is otherwise in a position of “substantial control” over the entity (broadly defined to include directors, officers, and others who may or may not have any actual ownership interest).
For newly formed entities (in 2024 or later), BOI reports must also include certain identifying information about the “company applicants” – typically, the legal professional(s) responsible for filing the certificate of formation to create the entity.
How to File and Penalties for Not Doing So
All BOI reports are to be filed online and will not be publicly available (although the data may be shared between governmental agencies for law enforcement purposes). Guidance and instructions for preparing and filing a report are available at FinCEN’s website1.
Although there are consultants and accounting firms that may be willing to assist with preparation and filing for a fee, the reporting process is designed to allow most business owners to complete the filings without assistance from others.
Ultimately, the CTA is not something to be ignored, as penalties for noncompliance include civil fines of $500 per day (up to $10,000) and imprisonment of up to 2 years.
Despite Legal Challenges, the CTA is in Effect
In early March 2024, a federal court in Alabama, in a lawsuit challenging the CTA, granted a motion for summary judgment that the CTA is unconstitutional as a matter of law. That decision is currently on appeal. Importantly, the decision currently applies only to the parties in that case; there is no nationwide injunction precluding enforcement of the CTA. Today, the CTA remains effective, and so does your obligation to comply with it.
