Exploring the Corporate Transparency Act Exemptions: What Businesses Need to Know!
New federal regulations will go into effect on January 1, 2024, and will force domestic and foreign companies doing business in the US to file comprehensive reports on their company applicants and beneficial owners, or face legal repercussions. These regulations, part of the Corporate Transparency Act, are intricate and include various corporate transparency act exemptions.
For private fund sponsors, it’s crucial to grasp how these imminent reporting demands impact the entire spectrum of their operations, from funds to management structures. The specifics of these obligations can vary greatly, influenced by the distinct ownership and control frameworks of sponsor entities, advisory bodies, funds, and their portfolio investments.
Continue reading this guide as it aims to demystify the reporting process, focusing on the structures and stipulations most relevant to private funds and their sponsors, ensuring clarity and compliance in navigating these new legal landscapes. Let’s dive in.
What is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) is a law passed in the United States in 2020 that requires certain businesses to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The goal of the law is to make it more difficult for criminals to use shell companies to hide their identities and activities.
The CTA applies to a wide range of businesses, including corporations, limited liability companies, and certain other types of legal entities. Businesses that are required to comply with the CTA must file a report with FinCEN that includes the following information about their beneficial owners:
- Name
- Date of birth
- Address
- Driver’s license number or passport number
- Social Security number (if known)
The CTA also requires businesses to update their reports if there are any changes to the information about their beneficial owners.
The CTA has been praised by law enforcement officials and transparency advocates, who say it will make it easier to track down criminals and prevent them from using shell companies to launder money or finance terrorism.
However, some businesses have criticized the law, saying it is too burdensome and will be difficult to comply with. The CTA is still relatively new, and it is too early to say what its long-term impact will be. However, it is clear that the law has the potential to make it more difficult for criminals to use shell companies to hide their activities.
Exploring the Corporate Transparency Act Exemptions
1. Securities Reporting Issuer
Entities that issue securities, either registered under Section 12 or obligated to submit regular updates under Section 15(d) of the Securities Exchange Act of 1934.
2. Governmental Authority
Organizations established under U.S., state, tribal laws, or through inter-state agreements, authorized to perform government functions.
3. Bank
Institutions recognized as banks under Section 3 of the Federal Deposit Insurance Act, Section 2(a) of the Investment Company Act of 1940, or Section 202(a) of the Investment Advisers Act of 1940.
4. Credit Union
Federal or state credit unions as specified in Section 101 of the Federal Credit Union Act.
5. Depository Institution Holding Company
Entities classified as bank holding companies under Section 2 of the Bank Holding Company Act of 1956 or savings and loan holding companies under Section 10(a) of the Home Owners’ Loan Act.
6. Money Services Business
Businesses engaged in money transmission registered under 31 U.S.C. 5330 and those registered as money services businesses under 31 CFR 1022.380 with FinCEN.
7. Broker or Dealer in Securities
Brokers or dealers defined in Section 3 of the Securities Exchange Act of 1934, registered in accordance with Section 15 of the Act.
8. Securities Exchange or Clearing Agency
Exchanges or clearing agencies as defined and registered under Sections 6 or 17A of the Securities Exchange Act of 1934.
9. Other Exchange Act Registered Entity
Entities not covered by exemptions for securities reporting issuers, brokers, or dealers in securities, or securities exchanges or clearing agencies, but registered under the Securities Exchange Act of 1934 with the SEC.
10. Investment Company or Investment Adviser
Entities that are either investment companies under Section 3 of the Investment Company Act of 1940 or investment advisers under Section 202 of the Investment Advisers Act of 1940, registered with the SEC.
11. Venture Capital Fund Adviser
Investment advisers meeting the criteria of Section 203(l) of the Investment Advisers Act of 1940, who have submitted the required documentation to the SEC.
12. Insurance Company
Companies defined as insurance companies under Section 2 of the Investment Company Act of 1940.
13. State-Licensed Insurance Producer
Insurance producers authorized by a state, overseen by the state’s insurance commissioner or equivalent, and operating from a physical office within the United States.
14. Commodity Exchange Act Registered Entity
An entity that either: (A) meets the definition of a registered entity under Section 1a of the Commodity Exchange Act, or (B) functions as one of the following – futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, commodity trading advisor, or a retail foreign exchange dealer as outlined in Section 2(c)(2)(B) of the Commodity Exchange Act – and is registered with the Commodity Futures Trading Commission as per the Act.
15. Accounting Firm
A public accounting firm that is registered following Section 102 of the Sarbanes-Oxley Act of 2002.
16. Public Utility
An entity classified as a regulated public utility under 26 USC 7701(a)(33)(A), offering telecommunications, electrical power, natural gas, or water and sewer services within the United States.
17. Financial Market Utility
A financial market utility that has been designated by the Financial Stability Oversight Council under Section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Pooled Investment Vehicle
A pooled investment vehicle operated or advised by an entity falling within exemptions for banks, credit unions, brokers or dealers in securities, investment companies or advisers, or venture capital fund advisers.
19. Tax-exempt Entity
An organization that: (A) is described in Section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under Section 501(a) of the Code, including those that have recently lost such status but are within a 180-day grace period, (B) a political organization exempt under Section 527(a) of the Code, or (C) a trust as described in Section 4947(a) of the Code.
20. Entity Assisting a Tax-exempt Entity
An entity primarily engaged in providing financial assistance to or overseeing the governance of a tax-exempt entity (as defined in exemption 19), that is a United States person, controlled by U.S. citizens or permanent residents, and primarily funded by such U.S. persons.
21. Large Operating Company
An entity that employs over 20 full-time employees in the United States (as defined in 26 CFR 54.4980H-1(a) and 54.4980H-3, with “United States” interpreted as per 31 CFR 1010.100(hhh)), maintains a physical office in the United States, and has reported over $5 million in gross receipts or sales on its previous year’s federal tax return, excluding income from outside the United States.
22. Subsidiary of Certain Exempt Entities
An entity whose control or ownership interests are directly or indirectly held by one or more entities listed in exemptions 1 through 17 and 19 through 21.
23. Inactive Entity
An entity that existed before January 1, 2020, is not actively conducting business, is not foreign-owned, has not changed ownership in the last year, has not transacted more than $1,000 in the last 12 months, and holds no assets, including interests in any corporation, LLC, or similar entity, either within the United States or internationally.
Final Words
The Corporate Transparency Act (CTA) introduces crucial measures for enhancing business transparency and combating financial crimes by mandating the disclosure of beneficial ownership information.
Recognizing the need for balance, the Act provides exemptions for certain entities, minimizing the regulatory burden on low-risk businesses and those already under strict regulations. This approach ensures the CTA’s objectives are met without stifling economic growth or innovation.
For a comprehensive overview of how these exemptions might affect your business and to stay ahead with exclusive updates and filing assistance you won’t find anywhere else, click here.