For the first time in U.S. history, the Corporate Transparency Act (‘CTA’) imposes broad ownership disclosure obligations on any entity formed or doing business in the United States.  Substantial civil and criminal penalties may be imposed for the failure to comply with CTA reporting obligations, with potential personal liability for officers and directors.

Who is required to file a ‘beneficial ownership interest report’ under the CTA?   Absent an exemption, any entity formed or registered to do business in the United States (a ‘Reporting Company’) must file a beneficial ownership interest report (‘BOI Report’) with the U.S. Department of the Treasury (FinCEN).

What information goes on a BOI Report?   On a BOI Report, a Reporting Company must provide personal identifying information about each individual who is a ‘beneficial owner.’  In addition, a Reporting Company formed after 2023 must provide identifying information for professionals assisting in the formation process.

Is a Not-For-Profit Entity exempt from the CTA?  The CTA provides the following exemptions for not-for-profit entities (‘NFPs’) and their affiliates:

• An NFP tax exempt under Internal Revenue Code Section 501(c) (a ‘Tax-Exempt NFP’).
• A domestic entity supporting a Tax-Exempt NFP if (a) the entity operates exclusively in such support role and (b) U.S. citizens or permanent residents beneficially own or control the entity and provide a majority of its funding.
• An entity wholly-controlled or -owned by a Tax-Exempt NFP, alone or together with other entities that are also CTA-exempt (an ‘Exempt Subsidiary’).

If an NFP ceases to be a Tax-Exempt NFP for more than 180 days (such as by failing to file its Form 990), the NFP and its affiliates will lose any CTA exemption based on the NFP’s prior status as a Tax-Exempt NFP.

In addition, the CTA also exempts as a ‘large operating company’ any U.S.-based entity that has at least 20 full-time U.S. employees and at least $5 million in gross receipts.  Other exemptions are also allowed for heavily-regulated industries (such as banks and public companies). So, if an NFP or any of its affiliates fails to qualify for a CTA exemption based on Tax-Exempt NFP status, another CTA exemption may be available.

Can a Tax-Exempt NFP just forget about the CTA?  If a Tax-Exempt NFP partners with a for-profit entity (non-CTA exempt) as part of its mission, the Tax-Exempt NFP cannot ignore the CTA.

Example:  A Tax-Exempt NFP provides affordable housing as a 50 percent member and co-manager of a limited liability company (‘LLC’).  A private developer corporation (non-CTA exempt) is the other 50 percent member and co-manager.  LLC is a Reporting Company, because it is neither wholly-owned nor wholly-controlled by the Tax-Exempt NFP.

So, in these situations, the Tax-Exempt NFP faces the following concerns:

• As a potential ‘beneficial owner,’ a Tax-Exempt NFP officer or director may be required to provide identifying information for inclusion on the Reporting Company’s BOI Report.
• If a Tax-Exempt NFP has operational control over an affiliated Reporting Company, the Tax-Exempt NFP’s officers and directors face personal responsibility for the Reporting Company’s CTA filing compliance.

CTA penalties (with personal liability) attach to both the failure to provide identifying information and the failure to file any required BOI Report.

Who is a Beneficial Owner?  In general, a ‘beneficial owner’ includes any individual who directly or indirectly owns or controls 25 percent or more of the ownership interests in, exercises ‘substantial control’ over, or is an executive officer of a Reporting Company.  Under these rules, a Tax-Exempt NFP’s officers and directors may be treated as ‘beneficial owners,’ even though they own no equity in the Reporting Company.  Furthermore, because an entity cannot be a beneficial owner, an affiliated  Reporting Company must look up through any multi-tier ownership structure to find the ultimate individual ‘heart beats.’

When does a Reporting Company have to file a BOI Report?  Every Reporting Company must file an initial BOI Report at some point during 2024 (with the exact filing date depending on date of formation) and file an updated BOI Report no later than 30 days after any change in previously-reported information.  In practice, an event as innocuous as a change of address can trigger an updated BOI Report filing.

Does an NFP need to develop CTA-related risk management?  Because everyday events may trigger a BOI Report, a Tax-Exempt NFP should develop internal procedures to monitor the ownership, operations and management of any affiliated Reporting Company.  Before an affiliated Reporting Company closes on a transaction, the Tax-Exempt NFP should make sure that the affiliated Reporting Company has all necessary CTA filing information and the ability to update such information.

Does the CTA have any impact on an NFP’s Personnel? An NFP should educate its officers and directors about their actual and potential future CTA-related disclosure obligations and consider the CTA’s effect on the NFP’s ability to recruit talent (especially volunteers).

And just in case you heard …   In National Small Business United v. Yellen, the U.S. District Court for the Northern District of Alabama declared the CTA unconstitutional on narrow federalism grounds, prohibiting the CTA’s enforcement against the particular litigants.  In response, FinCEN announced that, while the CTA may not be enforceable against these litigants, the CTA remains fully in force for everyone else.  So, even though the court’s decision may have clouded the CTA’s future, prudence requires continuing present compliance with the CTA.

Mark A. Limardo is a partner in the New York office of Herrick, Feinstein LLP, and as part of his practice, a leading member of the firm’s Corporate Transparency Act working group.