The Corporate Transparency Act (the “CTA”) remains on track – as of now, your company created before January 1, 2024, absent one of the few exemptions, MUST make an initial filing before the end of 2024. This SKO Insider will summarize some recent developments, as well as provide more information about how to determine a company’s “beneficial owners” under the law.
Litigation
Previously, we filled you in on litigation challenging the constitutionality of the CTA. The farthest along of those cases, National Small Business United, is on appeal to the 11th Circuit Court of Appeals. Although the trial court held that members of National Small Business United would not need to comply with the CTA, that decision may be overturned on appeal, and we do not know when the appeal will be resolved. Meanwhile, trial courts in Oregon and Virginia have held that the CTA is constitutional. For now, unless your company was a member of National Small Business United as of March 1, 2024, the CTA fully applies to you and the filing deadlines need to be satisfied.
FinCEN Mailings
FinCEN, the office of the Department of the Treasury charged to enforce the CTA, has launched a program to raise awareness of this law. These efforts include television and newspaper advertisements, and most importantly, a mass mailing. The mailings from FinCEN are legitimate and do nothing more than remind companies of the need to comply with the law. But beware of fraudulent communications that seek to use legitimate FinCEN mailings as cover. FinCEN is NOT charging a fee to file CTA reports, so any “form” with a filing fee should not be trusted. Likewise, a direction to FinCEN.com (as contrasted with .gov) is not legitimate. If you receive something you think may not be legitimate, please forward it to your contact attorney at SKO or a member of the SKO CTA Practice Group.
What Companies Have To File CTA Reports?
As noted in a prior Insider and greatly expanded upon in the comprehensive article written by Allison Donovan and Tom Rutledge, the CTA’s filing obligations apply to “reporting companies.” Absent the application of one of the twenty-three exemptions (discussed below), essentially every corporation (business, professional, or nonprofit) and limited liability company is a reporting company, while general partnerships typically are not reporting companies. Other entities such as limited partnerships, limited liability partnerships or cooperatives may or may not be reporting companies. Please reach out to your SKO contact attorney or a member of the SKO CTA Practice Group for an assessment of whether the company is a “reporting company” and the availability of any of the exemptions.
Home Owner Associations / Condo Boards
Recently, there has been discussion around whether homeowner associations, condominium boards, and similar organizations are subject to the CTA. The short answer in most situations is “yes.” The few that are governed by IRC section 501(c)(4) may take advantage of a CTA exemption for “tax exempt” organizations (which includes all of the subcategories of IRC section 501(c)), but associations that are tax exempt under IRC section 528 may not do so.
Professional Practices
We have received numerous questions about whether professional practices, such as medical, dental, accounting, architecture, engineering, and accounting firms, are exempt from the CTA. In many instances they must file. There is no exemption for professional firms except for accounting firms that are registered with the Public Company Accounting Oversight Board; only about 800 firms worldwide are registered and there are about 50,000 accounting firms in the U.S. Otherwise, professional firms must file CTA reports unless the firm can satisfy another exemption such as the exemption for “Large Operating Companies.”
De Minimis Companies
Many clients are unpleasantly surprised to hear that there is no “de minimis” exemption from CTA reporting requirements, even where the company engages in virtually no activity. For example, a single-member LLC that does nothing except hold title to a house must file CTA reports. Why? Because an LLC is a reporting company, and on these facts there is no applicable exemption from reporting.
The Twenty-Three Exemptions
If you have established that your company is a “reporting company” under the CTA, the next question is whether your company is subject to one of the twenty-three exemptions. Many of the exemptions are exceptionally narrow – there is one that encompasses a total of eight companies nationwide. The exemption for a “Large Operating Company” (“LOC”) has broader application, but requires the satisfaction of several requirements, the analysis of which can be complicated. If you think your company might satisfy the requirements of the LOC exemption or any other exemption, a member of the SKO CTA Practice Group can assist. Due to the complexity of some exemptions, if you think one might apply, please contact us as soon as possible.
Will the CTA be Repealed or Modified?
We are carefully tracking a variety of efforts in Congress to defer the initial filing date for companies created before January 1, 2024; however, there can be no assurance that Congress will act before the end of the year. Absent significant movement the January 1, 2025 filing deadline remains in place. While it is possible that the upcoming change in presidential administration could lead to the CTA’s delay or repeal, there is no way to predict, and time is running out before the current deadline. Irrespective of its unpopularity, the CTA is a part of a worldwide effort to combat money-laundering, and the U.S. has long received poor marks because of the absence of a federal beneficial ownership database. How the new administration will address those concerns remains unknown.
Beneficial Owners
CTA reports require information about the reporting company itself as well as every “beneficial owner” of the reporting company. The definition of “beneficial owner” is lengthy, and it is entirely possible to be a beneficial owner without owning any of the reporting company. To provide a simple example, the “CFO” of an HOA, who may not be the title owner of a property subject to the HOA, is a “beneficial owner.” The analysis can quickly become complicated.
There are two distinct tests for who is a beneficial owner. The first test looks to who directly or indirectly owns 25% or more of the “ownership interests” in a reporting company. The term “ownership interests” includes stock and LLC interests, as well as options, warrants and in some instances even debt. Each of the four equal shareholders in a corporation with a single class of stock is clearly a beneficial owner. But assume there are five equal shareholders (20% each) and each holds an option to acquire an additional 10% of the stock (fully diluted). Most looking at those facts would assume each is a 20% owner and that none are at or above the 25% threshold. But the CTA treats every one of those 20% shareholders as a 30% owner (yes, the CTA says in effect that there are five 30% owners) that must be reported as a beneficial owner on the CTA report.
The second test for being a beneficial owner is to hold “substantial control” over the reporting company. This is the more complicated test, and there is a great deal of uncertainty in its application. While there are certain categories such as the “senior officers” who clearly have substantial control, typically it is a fact dependent assessment that, for example, in an LLC requires a review of the operating agreement. In some five-member LLCs, every member might be a beneficial owner, while in another five-member LLC only one might be a beneficial owner.
The deadline for completing this analysis and filing initial CTA reports is rapidly approaching, so please reach out to a member of the SKO CTA Practice Group so this process can begin.
