Corporate Transparency Act Exemptions: Does Your Business Qualify?

The Corporate Transparency Act passed in January 2021, affects businesses across the United States. Specifically, this legislation aims to increase the transparency of corporations by requiring them to disclose their beneficial owners, making it easier for law enforcement to find financial crimes such as tax evasion, terrorist financing, and money laundering.

This guide will help you determine whether your business is eligible for a CTA exemption, meaning you would not have to file a beneficial ownership information report. Always make sure to check with a legal or tax expert to ensure that you’re in compliance, as the CTA has civil or criminal penalties that can negatively impact your business.

3 Step Process To Determining Your Business’s Exemption Status

The Corporate Transparency Act applies to a wide variety of business entities but also offers lots of exemptions. This can make it difficult to determine whether or not you need to submit an initial BOI. Here are three steps to determine if your business is exempt:

Determine if Your Company is a Reporting Company

The Corporate Transparency Act primarily applies to companies that are registered with the Secretary of State or other similar government offices, including tribal governments. This includes:

• Corporations: Traditional business structures with limited liability for their shareholders.
• Limited Liability Companies: Business structures offering flexibility and pass-through taxation
• Partnerships and Trusts: Business arrangements where multiple people share ownership and trusts that function similarly to corporations or LLCs.

While this encompasses a lot of US businesses, this eliminated publicly traded companies and sole proprietorships from needing to apply for an initial beneficial ownership information report, due to previously existing reporting requirements.

Find Your Businesses Beneficial Owners

The primary purpose of the Corporate Transparency Act is to determine who exerts significant control over a business. One of the key factors in determining whether you are required to report your BOI is to identify whether you have a beneficial owner.

Beneficial owners are defined as someone who owns or controls at least 25% of the business’s ownership interest or voting rights. They also must have the power to appoint or remove key decision-makers who also control important aspects of the business, such as presidents and vice presidents.

Find Any Exemptions That Apply To Your Business

Even if your company meets the top two criteria, some exemptions can certainly still apply to your business. The Financial Crimes Enforcement Network lists them directly:

23 Corporate Transparency Act Exemptions

There are 23 different Corporate Transparency Act Exemptions that are listed on their BOI reporting system. To determine whether or not your business fits any of them, consult a lawyer or CPA to determine whether it fits any of these short definitions:

1. Securities Reporting Issuer

A securities reporting issuer is a company that meets two criteria:

• The company must be registered with the Securities and Exchange Commission, as it operates within the public securities market and is subject to SEC regulations.
• It must already submit to existing reporting requirements that disclose significant ownership information.

By looking at these existing reporting structures, the CTA exemption for securities reporting eliminates the need for a BOI, to eliminate duplicate filings.

2. Governmental Authority

In the Corporate Transparency Act, a governmental; authority refers to any entity that is established under legal jurisdictions and is exercising governmental authority on its behalf. It has to be established by law and perform duties and functions considered governmental in nature.

3. Banks

Banks are exempt entities from filing under BOI reports due to the already robust number of regulations surrounding banking.

4. Credit Union

The exemption for banks under the Corporate Transparency Act almost directly correlates to credit unions as well. Rigorous regulatory frameworks already in place by the Financial Crimes Enforcement Network mean there is no BOI report needed for credit unions.

5. Depository Institution Holding Companies

A Depository institution holding company is a holding company that controls one or more depository institutions, such as banks or credit unions. These often manage multiple financial institutions and thus already fall under a large scale of regulatory frameworks.

6. Money Services Businesses

Similarly to depository institution holding companies, money services businesses don’t have to file BOI reports due to the overlapping regulatory framework that comes from the Financial Crimes Enforcement Networks banking legislation.

7. Broker or Dealer in Securities

Brokers or dealers in securities are exempt from filing beneficial ownership information reports due to the already existing Securities and Exchange Commission regulatory frameworks. They already file regular reports that disclose ownership information.

8. Securities Exchange or Clearing Agency

Securities exchanges are a centralized marketplace where investors can buy and sell securities, such as stocks, bonds, and derivatives. Clearing agencies ensure the time transfer of securities and funds between these buyers and sellers, and both are granted exceptions due to their SEC status.

9. Other Exchange Act Registered Entity

The Corporate Transparency Act refers to entities registered with the securities and exchange commissions, but they don’t fall into the above categories. They are also managed by the SEC and thus don’t need to report their BOI, as their ownership information has already been disclosed.

10. Investment Company or Investment Adviser

Any investment company registered under the Investment Company Act of 1940 with the Securities and Exchange Commission is exempt. The same goes for investment advisers, as their information is already held under Section 203(I) of the Advisers Act.

11. Venture Capital Fund Adviser

Venture capital fund advisers are exempt IF they file the required reports on Form ADV with the Securities Exchange Commission. These are specifically Item 10, Schedule A, and Schedule B of Part 1A. Ensuring you meet these requirements will grant you an exemption, but consulting with a professional is recommended to ensure compliance if you’re unsure.

12. Insurance Company

The Corporate Transparency Act offers a straightforward exemption for insurance companies, meaning they are explicitly stated not to be required to file beneficial ownership information reports with the Financial Crimes Enforcement Network.

13. State-licensed Insurance Producer

State-licensed insurance providers are granted the same exceptions as insurance companies as long as they have a physical U.S. office, are licensed by a state, and are subject to ongoing state supervision by a state insurance commissioner or a similar regulatory body.

14. Commodity Exchange Act Registered Entity

The Commodity Exchange Act, also known as the CEA, regulates futures and derivatives trading. Entities involved in these markets need to register with the Commodity Futures Trading Commission.

Being registered under the CEA exempts you from filing under the Corporate Transparency Act, meaning that if you are filed as an:

• Futures Commission Merchant (FCM)
• Introduction Broker (IB)
• Commodity Trading Advisor (CTA)
• Commodity Pool Operator (CPO)
• Swap Dealer or Major Swap Participant

You will not have to file an initial beneficial ownership report.

15. Accounting Firm

While accounting firms are listed as exempt under the Corporate Transparency Act, they must consult with a qualified legal or compliance professional. The actual exception is still nuanced, creating uncertainty. Public accounting firms registered with the Public Company Accounting Oversight Board are exempt from CRA filing due to existing oversight and beneficial owner disclosure requirements.

16. Public Utility

This is another exception by the CTA that can be quite complicated, so make sure to ask a professional to ensure that you’re not required to fill out an initial beneficial owner report. Specifically, the exemption applies to public utilities that provide telecommunications services, electrical power, natural gas, or water and sewer services within the United States.

17. Financial Market Utility

In the same vein as a public utility, certain Financial Market Utility firms will be exempt under the Corporate Transparency Act. While these can be a bit complicated as there isn’t a universal definition of financial market utility, they would have to relate directly to the exemption for public utilities in the financial section.

18. Pooled Investment Vehicles

Pooled investment vehicles can qualify for an exemption under the Corporate Transparency Act as long as they fall under the Investment Company Act of 1940 and if it is identified by their investment advisor on their form ADV with the Securities and Exchange Commission.

19. Tax-Exempt Entities

This encompasses a broad range of organizations that qualify for exemption from paying federal income tax in the United States, such as Non-Profit Organizations, Government Entities, Labor Unions, and Social Welfare Organizations.

20. Entity Assisting a Tax-Exempt Entity

This is a specific exemption category and must meet the criteria of exclusive purpose, a U.S. person, under U.S. ownership, through U.S. funding. Entities that qualify for this exemption don’t need to file a beneficial ownership report with FinCEN, but they do have a litany of other requirements that they have to meet.

21. Large Operating Companies

Large operating companies are given exemptions only to the company itself. If another entity owns the exempt company, the ownership structure of the owning entity might still need to be reported.

Large operating companies have to meet all of these criteria:

• Companies with less than 20 full-time employees in the U.S.
• Companies with less than $5 million in annual gross receipts or sales
• Companies without a physical office operating within the U.S.

While most large operating companies are going to fall under this exemption, consulting with a professional will help ensure that you don’t have to file an initial beneficial owner report.

22. Subsidiary of Certain Exempt Entities

Subsidiaries of certain exempt entities are one of the most prevalent exemptions in the Corporate Transparency Act, as it allows certain subsidiaries that aren’t covered by the original exemption the benefits of not filing a beneficial ownership report with the Financial Crimes Enforcement Network. The interests of the company must be fully controlled or owned by one or more exempt entities.

23. Inactive Entity

An inactive entity will not have to file an initial beneficial ownership report if it meets all of the following criteria:

• Must not have been formed or registered before January 1st, 2020.
• Must not be engaged in any active business operations, including contracts, making investments, or generating revenue.
• Cannot be owned or controlled by a foreign person, directly or indirectly.
• There cannot be changes in the entity’s ownership structure within twelve months.
• The entity must not have sent or received funds over $1,000 within the preceding 12 months.
• The entity cannot hold any assets, such as property, investments, or intellectual property.

If all of these are met, the entity is considered inactive and will not need to report ownership to the Financial Crimes Enforcement Network.

Corporate Transparency Act Exemption Examples

Here are some examples of how these exemptions would function in the real world.

Scenario 1 – Sarah’s Melodies, LLC

A young musician named Sarah just launched her music career, so she created a limited liability company called “Sarah’s Melodies, LLC”. Without sealing a major deal or funding, Sarah can claim that as the sole owner of Sarah’s Melodies, she has a sole proprietorship and does not have to file a beneficial ownership information report.

However, if Sarah ever secures funding or enters into a partnership that involves other entities owning a portion of either LLC, the exemption might no longer apply, and a beneficial ownership report may be required. She needs to ensure the company is wholly owned by her to avoid any potential civil or criminal penalties.

Scenario 2 – Miller Family Bakery

The Miller family has been running a baker in their local town for generations The bakery is well established, topping over $5 million in revenue, and has 19 full-time employees year-round. The Millers decide to hire 2 more front-of-house onto the team, making them able to qualify for a large operating company exception.

While this would exempt them if they decided to hire two other full-time staff, having one full-time staff leave would mean they were no longer under the exemption and could mean they were out of compliance with the Corporate Transparency Act and make them vulnerable to civil and criminal penalties.

Scenario 3 – The Dormant Investment Vehicle

In 2015, a group of college students formed some pooled investment vehicles LLC called “Tech Ventures LLC” to pool their funds and invest in tech startups that they felt would have a large return.

Risk preferences between the friends led them to instead invest in these companies separately, meaning “Tech Ventures LLC” was left with no outstanding investments or active bank accounts. They qualify for the Inactive Entity exemption.

This could change if contracts, investments, or bank accounts were started with the company name.

Fulfill Corporate Transparency Act Compliancy with TaxCredits

By requiring businesses to report their beneficial ownership information, the CTA helps to combat money laundering, terrorist financing, and other illegal activities that can have huge ramifications on the business world. Ensuring your business is compliant isn’t just about avoiding civil or criminal penalties, but demonstrating your commitment to ethical and responsible business practices.

With TaxCredits, you don’t have to wait until the last minute to navigate the Financial Crimes Enforcement Network. We have all of the CPA expertise that you need to identify your beneficial owners and set up a system for you to stay in compliance continually. Taking proactive steps toward compliance today is a smart investment in your business’s long-term success and security.

FAQs

Who needs to file a BOI in 2024?

Corporations, Limited Liability Companies, Partnerships, and other business entities formed will have to file a BOI in 2024.

Are churches exempt entities from the CTA?

Yes! If you are a tax-exempt entity, such as a church, you won’t have to fill out a beneficial ownership report.

Do nonprofits have to comply with the Corporate Transparency Act?

Nonprofits do not have to file a beneficial owners report under the Corporate Transparency Act because it is a tax-exempt organization.

Do single members’ LLCs need to file BOI?

Single members LLCs are under the same obligation as other reporting entities unless they fall under the 23 exemptions listed above. Make sure to talk to a legal or tax professional to establish whether or not you fall under certain exempt entities if you want to claim an exemption.