The Corporate Transparency Act – Exemptions

The Federal Government passed the Corporate Transparency Act with bipartisan support in 2021. The reporting requirements under the Corporate Transparency Act (the “Act”) go into effect on January 1, 2024. The purpose of this article is to review the companies who will NOT have to comply with the terms of the Act. The Act will require all small businesses to report certain ownership information to FinCen (Financial Crimes Enforcement Network) beginning on January 1, 2024. However, the Act does contain 24 exceptions or categories of companies that will be exempt from filing reports with FinCen.

But first, a quick review of the Act. The Act applies to all corporations and limited liability companies nationwide. The Act requires the disclosure of all persons who own 25% or more of the company’s equity, a person who is not an owner but asserts control over the company, and the person who signed the paperwork creating the company.

This article will focus on two of the exceptions when a company will not have to report to FinCen. The first exception pertains to a company that is inactive. But this inactivity has to meet the definition of inactivity in the Act. In order to be considered “inactive” under the Act, the company:

(i) must have been in existence for over one year,

(ii) is not engaged in active business,

(iii) is not owned, directly or indirectly, by a foreign person,

(iv) has not had a change in ownership in the prior twelve months,

(v) has not sent or received funds in the prior twelve in an amount greater than $1,000, and

(vi) does not own any assets – including being the owner of another entity.

If your company falls within FinCen’s definition of “inactivity,” then your company is not required to submit the mandatory report with FinCen. However, if your company does fall within this definition of “inactivity,” then it is my recommendation that this company be officially dissolved. My recommendation to dissolve this company is primarily based on the prevalence of identify theft. It sure seems to be “when” and not “if” a person’s identity will be stolen. The identity of a corporate entity can also be stolen and if the entity is inactive, this means that you are most likely not closely monitoring the business and affairs of the entity. If this is the case, this identity theft could go on quite some time without you ever noticing. And, if the corporate entity is truly inactive, I think it is good practice to fully and finally windup the affairs of such an entity by dissolving the same.

The second exception pertains to larger companies. If a company meets the following criteria, then the company will not be required to report to FinCen. In order to be considered a larger company under the Act, the company:

(i) has more than twenty full time employees located in the USA,

(ii) demonstrates more than $5,000,000 in gross receipts or sales in the aggregate on the company’s “previous year Federal income tax return” (for initial reporting purposes, this may be the 2022 or 2023 tax return depending on the date the report is filed with FinCen), and

(iii) the company has a physical office within the USA.

Please note, there are twenty-two additional exceptions from having to report which, in general, are entities that already have reporting obligations with the federal government – such as public accounting firms and companies that are already registered with the Securities and Exchange Commission.

In my opinion, the two exceptions referenced in this article are going to be the two most popular exceptions. If you have any questions regarding the Act in general, the reporting requirements of a particular company, or you would like to review whether your company should or should not be dissolved do not hesitate to be in contact to discuss such matter.

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Chris Corpus

Founding Partner at Corpus Law Inc

This article does not provide legal advice or create an attorney-client relationship. If you have any questions or would like to learn more about this topic or if you have other legal questions, do not hesitate to contact Chris Corpus, Esq. of Corpus Law Inc at 216-973-2475. Copyright Christopher A. Corpus 2024.