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The Three Corporate Transparency Act Exemptions You Must Know

The Three Corporate Transparency Act Exemptions You Must Know

The Corporate Transparency Act (CTA) is a new law that requires many “reporting companies” to report information about the company and its owners to the Financial Crimes Enforcement Network (or FinCEN) of the U.S. Department of the Treasury.

Under the new CTA rules, a “reporting company” is defined as an entity that is created by filing a document with the secretary of state. Broadly speaking, this encompasses most LLCs, Corporations, and LPs.

However, the regulations do provide exemptions for 23 types of reporting companies. I won’t walk you though all of them in this article. But there are three exemptions that every business owner and real estate investor must know about.

  1. Tax-Exempt Entity Exemption

The first exemption is the tax-exempt entity exemption, and it includes three types of entities. The first is that the entity is an organization described in section 501(c) and exempt from tax under section 501(a). The second is an entity that is a political organization defined in section 527(e)(1). And lastly, the entity is a trust described in section 4947(a).

Most notably missing under this exemption is Homeowners Associations (or HOA’s) who file tax returns under Section 528 of the tax code. While there has been talk about exempting these HOA’s, it most likely won’t happen. Because of this, most HOA’s will need to comply with the CTA by reporting their BOI to FinCEN.

  1. Inactive Entity Exemption

The second exemption is the inactive entity exemption. In order to be exempt as an inactive entity, a business must meet the following six requirements:

  • Be in existence before January 1st, 2020
  • Not be engaged in active business
  • Have no ownership held by a foreign person
  • Have had no change in ownership in the last 12-month period
  • Have not sent or received funds over $1,000 within 12-month period; and
  • Does not hold any type of assets

For real estate investors, this exemption may apply to syndications that have wound up, or to investors who formed an entity to buy a rental property but didn’t. And if you meet all of the six requirements listed above, your reporting company will not need to report your BOI to FinCEN. But if you aren’t sure you meet all of the criteria, you are better off filing.

  1. “Large Operating Companies” Exemption

The third exemption is the “large operating companies” exemption. And an entity falls into this category if:

  • It employes 21 or more employees in the US
  • It has more than $5 million in gross receipts or sales in the US, and
  • It has a physical office in the US

If a company meets all three requirements, they do not need to report their BOI to FinCEN. But if someone starts out thinking that they will have at least $5 million or more in gross sales, they will still need to file since they have no proof of their lofty goals.

Other Exemptions

Most of the other exempt entities fall into the already regulated categories of insurance, banking, utilities, and securities. And if your entity falls into those categories, then you won’t need to perform a FinCEN filing.

Conclusion

The CTA is a new law with many intricacies. And one important consideration is to determine whether your company is actually a “reporting company” under its regulations.

Luckily, we here at Corporate Direct would be happy to help you navigate this new law. For more information on the CTA, you can schedule a free 15-minute consultation with one of our incorporating specialists by clicking the link here: https://corporatedirect.com/schedule/

 

Check out Ted's weekly YouTube segment, Direct Answers from Corporate Direct!

In this series, Ted answers questions from our followers while educating them about corporate law, business formation, real estate, wealth building, and asset protection. Leave us a comment with your question and it could be featured in an upcoming video!

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Corporate Transparency Act Penalties and Deadlines

Corporate Transparency Act Penalties & Deadlines

 The Corporate Transparency Act (or CTA) is a new law that very few people are talking about. It took effect on January 1st of this year, and it requires most small businesses to report personal, non-economic information to the Financial Crimes Enforcement Network (or FinCEN).

And if you don’t report this information, you can face very steep consequences.

 

What Are the Penalties for Not Filing?

If you don’t submit these reports to FinCEN, you can face penalties that include $10,000 in fines and/or 2 years in jail.

And even with these significant penalties, there has been no serious effort to educate people about the CTA. In fact, many business owners and real estate investors have been left in the dark.

The easiest way to avoid these penalties is to submit these FinCEN reports as soon as possible. And the timing to submit these reports depends upon when the entity was formed.

 

When to File the FinCEN Reports

So, when exactly are these reports due? The timing to file them depends upon when your company was formed.

    • If your reporting company was formed before January 1st, 2024, you have one year (or until December 31st, 2024) to report your information to FinCEN.
    • If your reporting company was formed between January 1st, 2024 and December 31st, 2024, you have 90 days to report your information to FinCEN.
    • If your reporting company was formed after January 1st, 2025, you only have 30 days to report your information to FinCEN.
    • When your reporting company has a change in ownership, a new mailing address, or someone discovers an error in a previous report, you only have 30 days to file the corrected reports.

 

It is best practice to get these reports in as soon as possible. In fact, if you formed a company in the first few months of 2024, these reports have already come due.

And if you don’t want to submit these reports, we here at Corporate Direct can report this information for you. For more information on the CTA and its reporting requirements, you can schedule a free 15-minute consultation with one of our incorporating specialists by clicking the link here: https://corporatedirect.com/schedule/

 

 

Check out Ted's weekly YouTube segment, Direct Answers from Corporate Direct!

In this series, Ted answers questions from our followers while educating them about corporate law, business formation, real estate, wealth building, and asset protection. Leave us a comment with your question and it could be featured in an upcoming video!

Direct Answers 1

 

New York’s New Law That Mirrors The Corporate Transparency Act

New York’s New Law That Mirrors The Corporate Transparency Act

Just when you thought they were done passing laws! After the passage of the Corporate Transparency Act (CTA), other states have passed similar laws with similar aims. Most notably, New York just passed the New York LLC Transparency Act (or NYLTA).

 

NYLTA requires LLCs to report LLC’s ownership information to the New York Department of State (or NYDS). It was passed on December 22, 2023, and takes effect on December 21, 2024.

 

In many ways, this law mirrors the CTA. This is because many of the requirements are the same. For example, the beneficial ownership requirements and reporting company exemptions under both laws are identical.

 

However, there are a few notable differences. Unlike the CTA, NYLTA only applies to LLCs. This means that if you have a corporation (or any other entity) in New York, this law doesn’t apply to you. However, you will still be subject to the CTA’s reporting requirements.

 

Another difference relates to the report timing. Under NYLTA, when an LLC’s ownership changes, you have 90 days to file the amended reports. This is much more lenient than the CTA, where reporting companies only have 30 days to report such changes.

 

The penalties under the CTA are also much steeper. If you miss any of the CTA’s deadlines, you are subject to $10,000 in fines and/or two years in jail.

 

However, NYLTA’s penalties are softer, but still noteworthy. For LLC’s already in existence, the deadline to submit their reports is January 1, 2025. After you miss this deadline by 30 days, your LLC will be listed as “past due.” And if you miss this deadline by 2 years, NYDS will issue a notice of delinquency. Then after another 60 days passes, your LLC will be delinquent. When delinquent, the LLC will have to pay a civil penalty of $250, but that penalty may increase in the future.

 

Before NYLTA was passed, one concern related to privacy. Initially, all the information reported under NYLTA was going to be available to the public. However, Governor Kathy Hochul made an agreement with the state legislature to only make this information accessible to law enforcement agencies.

 

This is beneficial to many LLC owners, especially for its owners who want to remain anonymous. However, just like the CTA, this is another target-rich database for hackers to attack.

 

Will other states follow New York’s lead? That remains to be seen.

 

For more information on the CTA and its reporting requirements, you can schedule a free 15-minute consultation with one of our incorporating specialists by clicking the link here: https://corporatedirect.com/schedule/

 

 

Check out Ted's weekly YouTube segment, Direct Answers from Corporate Direct!

In this series, Ted answers questions from our followers while educating them about corporate law, business formation, real estate, wealth building, and asset protection. Leave us a comment with your question and it could be featured in an upcoming video!

Direct Answers 1

 

There Will Be No Delaying The Corporate Transparency Act

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        Recently, a federal district court judge in National Small Business United v. Yellen (NSBU) held that the Corporate Transparency Act (CTA) was unconstitutional.[1] But does this mean that you don’t need to report any information to FinCEN?

        Unfortunately, some people think that this is the case. There are many people (including some attorneys) who are telling others that they can delay reporting their Beneficial Ownership Information (BOI) to FinCEN.

        However, this is not the case. And as it turns out, the deadlines for reporting your information have not changed.

        It is unfortunate that this misinformation has become so prevalent. However, we here at Corporate Direct believe that it is crucial to tell the truth about this case. Here are three facts that every business owner must know about this recent ruling.

  1. The ruling only applies to the named plaintiffs of the case

        The first matter is that the ruling only applies to the named plaintiffs of the case. National Small Business United (also known as the National Small Business Association) is a group of 65,000 small businesses across the country. And because the ruling only applies to these 65,000 entities, they are the only ones who do not have to report their BOI to FinCEN. As for every other business entity, they are still required to submit their BOI reports.

  1. The ruling could be overturned by the Supreme Court

        The second fact that people must know is that the NSBU case could easily be overturned once it inevitably reaches the Supreme Court.

        At the heart of the NSBU case is the issue of whether the CTA is unconstitutional. Liles Burke, the judge on the case, held that it was not. And his three grounds were that the CTA exceeded the Constitution’s limits under its foreign affairs powers, the commerce clause, and its taxing powers.

        It is worth noting that Judge Burke is a conservative judge who was appointed by President Trump. And if this case was before a liberal judge, they likely would have held the CTA to be constitutional.

        With these things in mind, how will the Supreme Court treat this case once it reaches them? While the Supreme Court does have a 6-3 conservative majority, they could still reverse Judge Burke’s holding on any of his stated grounds (especially under the commerce clause).

        Over the last few years, we have seen Chief Justice Roberts, Justice Kavanaugh, and Justice Gorsuch side with the liberal Justices on several cases before the Supreme Court. And given this recent track record, there is a good chance that at least two of them could side with the liberal justices. In this scenario, the Supreme Court could easily hold that the CTA is constitutional by a 5-4 or 6-3 decision.

  1. Other states have passed transparency acts of their own

        The third thing to know is that regardless of what the Supreme Court holds, states are beginning to enact their own transparency acts. And because corporate law has always been a creature of state law, the states are free to enact these types of corporate transparency rules.

        Many of these new rules model the CTA, and they also require reporting the same BOI to a branch of the state government.

        New York was the first state to enact such a rule. Recently, their state legislature passed the New York LLC Transparency Act (or NYLTA). NYLTA requires any LLC that is formed or registered to do business in New York to file similar BOI reports with the New York Department of State. The reporting period begins on January 1st, 2026.

       And other states are following suit. For example, the state legislatures in California and Maryland have proposed enacting similar bills. And don’t be surprised if other states propose similar bills of their own.

Conclusion

        Regrettably, there are some people out there who are providing inaccurate information on this recent ruling. But there is one thing that every business owner must know: if your business was not a named plaintiff in the case, you are still required to submit your BOI report to FinCEN. And if you don’t, your business is still subject to the CTA’s penalties. These include $10,000 in fines, and spending up to two years in jail.

        And even if the Supreme Court holds that the CTA is unconstitutional, you still may need to submit the same BOI reports to your state.

        We here at Corporate Direct care about educating our clients on the Corporate Transparency Act. For more information on the CTA, please check out our website at www.corporatedirect.com, or schedule a free 15-minute consultation with one of our incorporating specialists at https://corporatedirect.com/schedule/.

 

[1]National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.).

 

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

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The CTA Applies to Your HOA

The CTA Applies to Your HOA

By: Ted Sutton, Esq.

 

The Corporate Transparency Act (CTA) will apply to many different types of entities. It even extends to Homeowners Associations (HOA’s), including condominiums, community associations, and co-ops. This means that if you own an interest in an HOA, or you serve on the HOA board, you will need to report your information to FinCEN.

 

There are currently 23 exemptions under the CTA. One of which is the tax-exempt entity exemption, which includes three types of entities. The first is that the entity is an organization described in section 501(c) and exempt from tax under 501(a). Second, the entity is a political organization defined in section 527(e)(1). And lastly, the entity is trust described in section 4947(a).

 

Most notably missing under this exemption is Section 528 of the tax code, which applies to most HOAs. While there has been talk about exempting HOAs who file tax returns under Section 528, nothing has materialized as of yet. And we’re not holding our breath.

 

As it stands right now, most HOA’s will have to comply with the CTA. And in order to comply with the CTA, they will need to report some information to FinCEN.

 

The first piece of information is the “reporting company information,” which is the HOA body itself. The HOA will need to report its name, address, jurisdiction of formation, and its EIN Number.

 

The second piece of information is the “company applicant information”, which includes the person or business who is responsible for filing the information. The company applicant will need to report their name, birthdate, street address, and a driver’s license or passport.

 

The third piece of information is the “beneficial ownership information.” A “beneficial owner” is someone who owns at least 25% of the company, or someone who exercises “substantial control” over the company.

 

Some HOA boards have what are called “bulk owners.” And if these bulk owners own more than 25% of the HOA, they qualify as beneficial owners. As for the “substantial control” requirement, anyone who serves on the HOA board will have the required “substantial control” to qualify as a beneficial owner. In both situations, both groups will have to report their beneficial ownership information to FinCEN.

 

Another issue for HOA boards should look out for is when there is a change in ownership. Under the CTA, when there is any change in ownership or management, the HOA must report that information to FinCEN within 30 days. This may be a difficult task for many HOA’s, as some HOA’s have rapidly changing compositions. But once something changes, the clock starts ticking.

 

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

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Is Your Business an “Inactive Entity” Under the CTA?

Is Your Business an Inactive Entity Under the CTA

By: Ted Sutton, Esq.

 

Sam was a young man who began buying stocks at a young age. As he got older, his stock portfolio kept growing. But because he held the stocks in his personal name, Sam was concerned about the portfolio being exposed in a lawsuit. In order to protect his investments, Sam formed a Wyoming LLC in 2021.

Sam’s best friend was Ricardo, a Spanish citizen whom he met in college. Ricardo also loved to invest in stocks, and wanted to invest alongside Sam. So in 2023, Sam gave Ricardo a 30% interest in the Wyoming LLC. Ricardo contributed $5,000 worth of stocks into the LLC.

From that point on, it was all downhill for Sam and Ricardo. The Corporate Transparency Act (CTA) took effect in 2024. And because Sam and Ricardo didn’t timely report their Wyoming LLC, they were hit with a $10,000 fine.

What Are Inactive Entities?

Under the new CTA, companies are required to report information about their business and its “beneficial owners” to the Financial Crimes and Enforcement Network (FinCEN) at the U.S. Department of the Treasury. However, the CTA carves out 23 exemptions for certain entities.

One of these exemptions is the “inactive entities” exemption. Many business owners may try to argue that their company meets this exemption. But the exemption’s requirements are a lot stricter than you think.

“Inactive entities” are entities that:

  • Were in existence before January 1st, 2020.
  • Are not engaged in active business
  • Have no ownership held by a foreign person
  • Have had no change in ownership in the last 12-month period
  • Have not sent or received funds over $1,000 within 12-month period; and
  • Do not hold any type of assets

Your business must meet all of these requirements to be classified under the “inactive entities” exemption. And if it doesn’t, it must report information to FinCEN.

Application

As you can see, Sam’s Wyoming LLC failed all of the requirements. Sam created the entity in 2021. Ricardo, a Spanish citizen, acquired an interest in the Wyoming LLC within the past year and placed $5,000 worth of stocks into it. And, of course, the LLC owned assets in the form of stocks.

The only argument that Sam could make here is that the LLC was not engaged in any “active business.” But because the Wyoming LLC failed every other prong, it does not meet all of the “inactive entity” requirements. As such, it needed to report its information to FinCEN.

Beneficial Ownership Requirements

Another thing worth mentioning is the beneficial ownership requirements. A “beneficial owner” is someone who owns at least 25% of the company, or someone who exercises “substantial control” of the company. If someone meets the requirements of a “beneficial owner,” they must report their beneficial ownership information to FinCEN.

In the example above, Sam owned 70% and Ricardo owned 30% of the Wyoming LLC. Because both owned greater than 25%, they both qualify as “beneficial owners.” As such, both must report their beneficial ownership information, including copies of a passport or driver’s license, to FinCEN.

Conclusion

The CTA is a new law that nobody is talking about. It is complex and convoluted. Even worse, many business owners will be left in the dark about the law and its requirements.

Luckily, we here at Corporate Direct will help you navigate the CTA. For more information, click the link here.

 

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

For more of these updates, click the link below and subscribe to our YouTube channel.