Corporate Transparency Act Blog Series (Part 4) – Additional Considerations for the Corporate Transparency Act

Although there are various categories of entities exempt from reporting to FinCEN, as discussed in Part 3 of this blog series titled, “Entities Exempt from Reporting to FinCEN under the Corporate Transparency Act,” it is unlikely the exemptions will be as frequently applicable to small businesses or real estate holding companies compared to larger businesses. One of the more generic exemptions afforded by the Corporate Transparency Act (CTA) is Exemption #21: Large Operating Companies. Exemption #21 excuses entities from reporting to FinCEN when the entities employ more than 20 full time employees in the United States, have an operating presence at a physical office within the United States, and have more than $5,000,000 in annual gross receipts or sales. Compared to larger businesses, smaller businesses are less likely to employ more than 20 full time employees and have $5,000,000 in annual gross receipts or sales. While there are 22 other exemptions which may apply to small businesses, there is no generic exemption for small businesses like Exemption #21 for larger businesses. This places a greater strain on small businesses to report to FinCEN under the CTA compared to larger businesses.

Real estate holding companies are also disproportionately affected by the CTA compared to larger businesses. Different from smaller businesses, real estate holding companies presumably generate more than $5,000,000 in annual gross receipts or sales. However, it is less likely real estate holding companies have more than 20 full time employees to qualify for Exemption #21. Consequently, it is anticipated that the CTA will require a greater ratio of real estate holding companies to report to FinCEN compared to larger businesses but require a lesser ratio of real estate holding companies to report to FinCEN compared to smaller businesses.

For those entities which are not exempt from reporting to FinCEN, close attention must be paid to any changes in beneficial ownership after an initial report to FinCEN has been filed. Any change in an entity’s beneficial ownership must be reported to FinCEN. Entities have no longer than 1 year after a change in beneficial ownership to report an update to FinCEN. This means that if any individual acquires beneficial ownership or if any individual loses beneficial ownership in an entity, an updated report must be filed with FinCEN disclosing the change. Hence, not only must entities proactively determine which individuals have beneficial ownership prior to the effective date (January 1, 2024) of the CTA, but following the commencement of the CTA, entities must actively monitor any changes in beneficial ownership indefinitely.

Besides the disproportionate effect the CTA will have on small businesses and real estate holding companies, and the burden placed on companies to continuously assess beneficial ownership composition, the CTA continues to be criticized. For example, the $500 daily fine for failure to timely report to FinCEN is viewed as excessive, especially when considering the financial harm this may cause small businesses. Additionally, the accessibility restrictions for the reporting database are so great that even banking and law enforcement agencies will struggle to access the data. Perhaps most concerning is the possible loophole that exists within the Corporate Transparency Act. Opponents of the CTA worry the Act will fail to identify which businesses are being used to conceal illegal activity, while requiring innocent businesses to expend time and money to comply with the CTA’s ongoing reporting requirements.

Regardless of the criticisms, the CTA’s language has not been changed since FinCEN issued their final rule in September 2022. While it is possible the CTA might undergo changes eventually, it is in a business’s best interest to comply with all aspects of the CTA as it currently functions.

Contact Williams Parker today to gain valuable advice on how to best protect your business and ensure reporting compliance.