Organizations across the country are grappling with how to comply with the Corporate Transparency Act (“CTA”), which went into effect on January 1. Fortunately for nonprofit organizations, federally tax-exempt entities are exempt from the most onerous requirements of the CTA. However, that does not mean they can ignore the CTA altogether. As a nonprofit leader, you should evaluate closely whether all related entities qualify for an exemption and consider whether your organization is a beneficial owner that may be obligated to disclose certain information to a related organization that is not exempt from the CTA. In this article, we summarize what nonprofit leaders need to know about the CTA.

Background

The CTA was enacted by Congress to combat money laundering and other illicit financial activities by requiring corporate entities to report about their significant beneficial owners to a federal agency called the Financial Crimes Enforcement Network (“FinCEN”). The sweep of the legislation is broad, requiring every corporation, LLC, or other similar entity formed or registered to do business in the United States by filing through a secretary of state or similar organization to report unless an exemption applies. Entities that are required to file a report are called Reporting Companies. Entities and individuals that do not qualify for an exemption and fail to meet their obligations face possible civil and criminal penalties. You can learn more general information about the CTA, including reporting requirements and filing deadlines, here. Nonprofit leaders should evaluate their organization’s obligations under the CTA in three steps.

Step 1: Is your organization (or a related organization) considered a Reporting Company?

Nonprofit entities organized by a filing through the Secretary of State or similar organization and nonprofit entities formed in other countries but qualified to do business in the United States are considered Reporting Companies under the CTA unless they qualify for an exemption. As a result, nonprofit managers should review each entity in their corporate structures to determine whether those entities are exempt. Here are the three exemptions that are most likely to apply to nonprofit organizations and their related entities.

• Tax-Exempt Entities – This exemption applies to any organization that is tax-exempt by reason of being described in section 501(c) of the Internal Revenue Code. There is some uncertainty about whether this exemption applies to tax-exempt organizations that have not obtained a determination letter from the IRS, such as newly formed nonprofit entities or nonprofits that are not required to seek a determination letter, like churches. If this applies to your organization, you may want to read our separate article that dives into this issue here.
• Large Operating Companies – This exemption is designed for large companies that have an ongoing operating presence in the U.S. To fall within this exemption, an entity must meet three criteria: (1) employ more than 20 full-time employees in the U.S.; (2) have an operating presence at a physical office in the U.S.; and (3) have filed in the previous year a U.S. federal income tax or information return (including a Form 990) demonstrating more than $5 million in gross receipts or sales generated in the U.S. 
• Subsidiaries of Certain Exempt Entities – Entities that are controlled or wholly owned, directly or indirectly, by certain entities that are exempt from the CTA are also exempt. These include subsidiaries of Tax-Exempt Entities and Large Operating Companies, as those terms are defined above.

These exemptions are likely to exclude most nonprofits from being treated as a Reporting Company, but there are a few more exemptions that might also apply, including one for certain entities that assist tax-exempt entities and one for certain inactive entities.

Step 2: Are any of your entities (or one of your officers or directors) a beneficial owner of a Reporting Company?

Even if your organization is not a Reporting Company, it may be a beneficial owner of another entity that is a Reporting Company and therefore have certain obligations under the CTA. A beneficial owner is someone who directly or indirectly either: (1) owns or controls at least 25% of the ownership interests of a Reporting Company on a fully diluted basis or (2) exercises substantial control over a Reporting Company. Ownership for this purpose is defined very broadly to include any form of ownership through contract, arrangement, understanding, relationship, or otherwise and can be direct or indirect, or in some cases demonstrated through a lending arrangement. Substantial control is also defined broadly to include status as senior officer of a Reporting Company, authority over the appointment or removal of a senior officer or a majority of the board, or substantial influence over important decisions. 

If a nonprofit organization, or one of its directors or officers, is considered a beneficial owner of a Reporting Company, certain information about the beneficial owner will need to be provided to the Reporting Company to be included in its report. However, if an exempt entity has a direct or indirect ownership interest in a reporting company and an individual is a beneficial owner of the reporting company exclusively by virtue of the individual’s ownership interest in such exempt entities, the report may include the names of the exempt entity only.

Step 3: Has there been a change in circumstances that warrants review under the CTA?

It is important to note that the CTA’s reporting requirements are ongoing. So, in addition to evaluating whether any current arrangements give rise to obligations under the CTA, organizations should be on the lookout for circumstances in the future that may require action under the CTA. The following is a non-exhaustive list of circumstances that require evaluation under the CTA.

• Upon formation of new entities, consider whether the entity is likely to be a Reporting Company, whether its governance documents should include CTA language, and how it will track changes in beneficial ownership information.
• Upon any investment or change in ownership in a Reporting Company, consider whether the organization, or an officer or director, will be considered a beneficial owner.
• For Reporting Companies, upon changes of ownership or addresses for entities or beneficial owners and upon certain management changes, consider whether an updated report needs to be filed.
• If your organization is involved in a governmental investigation or litigation with a regulatory agency, they may have access to beneficial ownership information that has been reported, so consider whether it is consistent with your other disclosures.
• If there is a change in tax status (particularly if an entity loses its tax-exempt status), consider whether the organization remains exempt.

Ongoing Litigation

There are a number of outstanding lawsuits alleging that the CTA is unconstitutional for various reasons. On March 1, 2024, the Northern District of Alabama ruled that the CTA is unconstitutional because it is beyond the scope of Congress’ powers. However, the holding is limited to the specific plaintiffs in this case, and FinCEN has appealed this decision. It is also likely there will be other decisions concerning the constitutionality of the CTA. At the moment, the CTA remains in force (except with respect to the limited plaintiffs in the Alabama case), so Reporting Companies formed in 2024 should be mindful of their obligation to file within 90 days. Reporting Companies organized prior to January 1, 2024, have until the end of 2024 to make their filings. Such companies may consider waiting until later in the year to see if any dispositive holdings regarding the constitutionality of the CTA are rendered before this deadline.