Corporate Transparency Act: A Guide on Beneficial Ownership for Nonprofit Executives

The Corporate Transparency Act, enacted as part of the National Defense Authorization Act for Fiscal Year 2021, represents a significant shift in regulatory requirements for entities across the United States. This act, set to take effect on January 1, 2024, mandates the collection of beneficial ownership information with the aim of combatting money laundering and other illicit activities. Nonprofit organizations must be aware of this new regulatory landscape, especially if they have any involvement with reporting entities. This article provides nonprofit leaders with an overview of the Corporate Transparency Act, its objectives, reporting entities, exemptions, and implications for nonprofits.

Understanding the Corporate Transparency Act

The Corporate Transparency Act, passed into law on January 1, 2021, directs the Secretary of the Treasury to establish regulations for the collection of beneficial ownership information. This information pertains to individuals who own or control legal entities. The Act aims to protect national security interests, interstate commerce, and critical national security efforts while aligning the U.S. with international anti-money laundering standards.

Reporting Entities: Domestic and Foreign

The Act classifies entities into two categories: domestic reporting companies and foreign reporting companies. This includes corporations, LLCs, and other entities registered with a secretary of state or similar office. While there are 23 exemptions provided for entities less likely to be involved in money laundering, nonprofits should assess their status to determine if they fall within the reporting criteria.

Exemptions and Nonprofit Organizations

Nonprofit organizations, particularly those described under Internal Revenue Code Section 501(c), are generally exempt from the reporting requirements of the Corporate Transparency Act. This includes entities such as public charities, private foundations, social clubs, social welfare organizations, unions, and business associations. However, exempt organizations with controlling interests in reporting companies should carefully analyze their involvement, as certain individuals within the nonprofit may be considered beneficial owners under this rule.  If a nonprofit has any “controlled” entities in which there are outside investors, such as a joint venture with a taxable entity, unless that entity independently meets the requirements for an exemption, it will likely be a reporting company with implications for the individuals who serve the nonprofit.  For example, where officers, directors or other individuals affiliated with a nonprofit serve in an advisory or controlling capacity for a reporting company (such as controlling board seats or officer appointments) in connection with their service to the nonprofit, those individuals may be deemed “beneficial owners” of the reporting company for purposes of the Corporate Transparency Act.  Therefore, nonprofits should be aware of the implications of the Corporate Transparency Act when creating, investing in, and receiving contributions of business enterprises, whether as  joint ventures and or subsidiaries as to which the control criteria of the Act are triggered.

Defining Beneficial Owners

Beneficial ownership, as outlined by the Act, encompasses individuals who own 25% or more of a reporting company or those who exercise substantial control over it, even without direct ownership. For nonprofits with controlling interests in reporting companies, individuals responsible for substantial control may be considered beneficial owners of those reporting companies even though they hold no direct ownership.

Reporting Requirements

Reporting companies must provide basic information such as name, addresses, jurisdiction of formation, and IRS Taxpayer Identification Number. Crucially, they must also disclose detailed information on each beneficial owner, including full legal name, date of birth, residential address, and a unique identifying number from an official document.

Implications for Nonprofits

Nonprofits involved with reporting entities should carefully assess their level of control and involvement. If a nonprofit has effective control within the meaning of the CTA over a reporting company, individuals with substantial control over the nonprofit may be deemed beneficial owners of the reporting company. It is vital for nonprofits that control reporting companies within the meaning of the CTA to establish internal processes for collecting and verifying beneficial ownership information.

Willful failure to abide by the disclosure requirements of the CTA could result in civil and criminal penalties, including fines of up to $10,000, imprisonment for up to two years, or both.

Ensuring Compliance

To comply with the Corporate Transparency Act, nonprofits that control reporting companies should:

• Establish internal operations for collecting and verifying beneficial ownership information.
• Assign a senior officer the responsibility of filing reports with FinCEN.
• Be vigilant about updating reports if beneficial ownership information changes.
• Consider requiring staff and board members who are beneficial owners to obtain FinCEN identifiers so that the burden of updating information is on the individual rather than on the reporting company.
• Know when the filings are required to be submitted.

Nonprofits that have or may acquire a controlling interest in a reporting entity need to be aware of these new rules in January 2024. Although initial reports for reporting companies formed or registered prior to January 1, 2024 are not due until January 1, 2025, initial reports for reporting companies formed or registered on or after January 1, 2024, and before January 1, 2025, are due within 90 days of confirmation of formation or registration. If an entity is formed or registered on or after January 1, 2025, it must file its initial report within 30 days of confirmation of formation or registration.

The Corporate Transparency Act represents a sea change in regulatory requirements for entities across the United States. Nonprofit leaders must be aware of this new regulatory landscape, especially if they have any involvement with reporting entities. By understanding the Act’s objectives, reporting entities, exemptions, and implications for nonprofits, nonprofit executives can navigate this new legal framework effectively.

For further guidance and resources, refer to Farella’s comprehensive guide on the Corporate Transparency Act, available here.