BACKGROUND
The Corporate Transparency Act (the “CTA”) was enacted by Congress in 2021 to combat illicit financing activities, such as the use of shell companies for money laundering and tax evasion. Effective January 1, 2024, the CTA adds new requirements for company reporting, beneficial ownership disclosure and compliance with the Financial Crimes Enforcement Network (“FinCEN”).
REQUIREMENTS
The CTA mandates that corporations, limited liability companies and limited partnerships created or registered to do business within the U.S. (“Reporting Companies”) disclose identifying information of their beneficial owners to provide increased transparency into their control structures. Reporting Companies must provide FinCEN with a report detailing company information, and also listing their beneficial owners and the ownership percentage each individual holds (where applicable). Specifically, FinCEN defines “beneficial owners” as individuals who own or control at least 25% of the ownership interests of a Reporting Company or who exercise substantial control over such a company, meaning having the authority to appoint or remove senior officers or a majority of directors of a company, having the power to direct, determine, or influence critical decisions made on behalf of the company, or holding position or exercising authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs similar functions. For each beneficial owner, the Reporting Company must submit the following information: (i) full legal name; (ii) birthdate; (iii) home address; (iv) an identifying number from a driver's license, passport, or other approved documents; and (v) an image of the approved document that contains that identifying number.
IMPACT ON NONPROFITS
FinCEN provides for 23 exemptions to the CTA requirements, among which include tax-exempt entities described under Internal Revenue Code 501(c), as well as certain Section 527 organizations, charitable trusts, and taxable for-profit subsidiaries wholly owned by a tax-exempt entity.
Nonprofits who have submitted their Form 1023 applications and whose tax-exempt status is pending are also exempt from reporting requirements under the CTA. However, nonprofit organizations which are not tax-exempt, and do not intend to apply for recognition of tax exemption with the IRS, are not exempt from the reporting requirements. Differing opinions exist regarding whether a nonprofit in the process of submitting their Form 1023 application, but has not yet submitted their application, is exempt from the CTA. Additionally, entities which have their tax-exempt status revoked by the IRS must also submit a beneficial ownership information report within 180 days of losing their tax-exempt status.
Moving forward, all organizations, including nonprofits, should carefully review all key provisions of the CTA to ensure compliance with the CTA’s transparency standards.
This blog is for educational purposes only and does not constitute legal advice. This article, or contacting Bergman and Allderdice, does not in any way form an attorney-client relationship. Speak to a licensed attorney if you need help or advice navigating legal issues of the Corporate Transparency Act. If you have any questions or would like to learn more, please contact us at info@b-alaw.com or visit our website at www.b-alaw.com.