Corporate Transparency Act: Exemptions and Penalties

This article is the third in a series about the Corporate Transparency Act (CTA), 2022. Today, we take a look at which companies are exempt from filing, and what the penalties are for not filing.

Exemptions

It’s easier to figure out which companies have to file a CTA report by understanding which companies are exempt from filing such a report. The CTA specifically excludes 23 types of companies (already regulated by state/federal agencies) from reporting:

1. Securities issuers
2. Domestic governmental authorities
3. Banks
4. Domestic credit unions
5. Depository institution holding companies
6. Money transmitting businesses
7. Brokers or securities dealers
8. Securities exchange or clearing agencies
9. Other Securities Exchange Act of 1934 entities
10. Registered investment companies and advisers
11. Venture capital fund advisers
12. Insurance companies
13. State licensed insurance producers
14. Commodity Exchange Act registered entities
15. Accounting firms
16. Public utilities
17. Financial market utilities
18. Pooled investment vehicles
19. Tax exempt entities
20. Entities assisting tax exempt entities
21. Large operating companies*
22. Subsidiaries of certain exempt entities
23. Inactive businesses.

*“Large operating companies”:

1. Employ more than 20 full-time employees (min. 30 hrs/week; 130 hrs/mo) in the United States;
2. Filed Federal U.S. income tax returns in the previous year with more than $5,000,000 in gross receipts or sales.
3. Operate from physical premises in the United States (owned/leased, not a personal residence, and not shared).

Approximately How Many Companies Will Have to Report?

To estimate how many companies will need to file, finCEN acquired information from credible sources:

1. Financial Action Task Force (FATF) – estimates that around 30 million legal entities are currently operating in the U.S., and about two million new companies are formed every year.
2. CDD Rule – verifies the identity of entities that profit when companies open bank accounts. FinCEN estimates that about eight million new corporate bank accounts are opened each year.
3. Census Data – from the U.S. Census Bureau, in particular from the Statistics of U.S. Businesses.
4. State Statistics;
5. International Association of Commercial Administrators (IACA) 2018 Annual Reports Survey

FinCEN estimates that 30,290,586 existing companies could be required to report, and 3,777,420 new companies per year could be added to that number.

Penalties for Not Reporting

Failure to report, or supplying false information, will subject an individual to civil and criminal penalties, which may include:

• Assessment of a $500-per-day fine every day the violation continues (up to $10,000).
• Up to a two-year prison sentence.
• Both

Only eligible companies will file the reports; not individual beneficial owners and company applicants. Therefore, reporting companies must ensure that these individuals provide accurate, up-to-date information.

These consequences apply to persons who willfully provide false information or who purposely fail to report as required. No civil or criminal penalties apply to negligent violations. In other words, if individuals weren’t aware of the inaccuracy, weren’t attempting to evade requirements, and correct the information within 90 days, they won’t be penalized.

In the next article, we’ll provide a summary of what needs to be filed and/or updated, and the timeline for getting your Corporate Transparency Act reports processed.