Is my company (or fund) exempt from reporting under the Corporate Transparency Act (CTA)? ??
The simple answer is, if you are a small(ish) business in a non-financial sector, probably not. That's unfortunate news for most of us, but it makes sense when you consider the goal of the CTA, which is to combat illicit activity.*
Currently, there are literally millions of LLCs, C-Corps and similar entities active in the United States. Some of these (we aren’t sure how many) are used as cover for bad deeds. How exactly that works is not clear to most – that’s more the purview of criminals and prosecutors - but, for our purposes, a big component involves hiding the identities of the individuals behind these companies. The goal of the CTA is therefore to identify the actual people (known as the “beneficial owners”) behind those kinds of entities most commonly used to nefarious ends.
The laws’ drafters have made some effort to limit the scope of companies captured by carving out 23 possible exemptions. Most of these are for non-profits, banks, broker-dealers, etc. In other words, companies already subject to consistent governmental reporting. A large exception to this is, literally,?the “large operating company” exemption, which is any US company that employs more than 20 full-time employees and had gross receipts of $5M or more in the prior tax year. Large companies are not necessarily subject to more oversight than small ones, but (the thinking must be), large companies are less likely to be used as cover for bad acts. This makes a kind of intuitive sense, even if the numbers ($5M and 20 employees) are somewhat arbitrary.
As for VC funds (and their advisers), a good rule of thumb is that if your fund manager qualifies as an investment adviser or exempt reporting adviser, and has made the applicable Form ADV filings, the manager and fund entities should also be exempt from having to file under the CTA. Best to have your attorney or fund admin confirm though.
* The filing itself is also free and can be done in minutes with the right information. It can be tricky though. For example, who constitutes a “beneficial owner” is a bit misleading. It does not capture all shareholders (some minority holders need not be identified), and it captures some individuals who are not technically owners, like senior officers and those who helped form the company. More on this in a future post, including tips to save time when submitting multiple CTA filings.
(This post is not intended to constitute actual legal advice. Accelerator Counsel would be happy to assist with CTA interpretations and filings. You can reach me at: [email protected]). ??
