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The Corporate Transparency Act (CTA) is a new piece of legislation designed to enhance transparency in the ownership of legal entities in the United States. Among its many provisions, the CTA defines a category of entities known as “inactive entities” that are one of 23 types of companies exempt from these new disclosure mandates. Learn more about this facet of Corporate Transparency Act exemptions below.
Corporate Transparency Act Exemptions
Here is an outline of the requirements that need to be fulfilled to qualify as an inactive entity according to the CTA’s definition:
Formation Date
An inactive entity must have been in existence on or before January 1, 2020, meaning this exemption is not applicable to newly formed entities, but rather those that predate the CTA’s enactment.
Inactive Business
The entity cannot be engaged in active business operations. This implies that it’s not actively conducting commercial activities or providing services.
Ownership
An inactive entity cannot be owned by a foreign person, whether directly or indirectly, either wholly or partially.
Ownership Changes
The entity must not have experienced any change in ownership during the preceding twelve-month period.
Financial Activity
Inactive entities should not have sent or received any funds exceeding $1,000, either directly or through any financial account in which the entity or any of its affiliates had an interest, in the preceding 12 months.
Asset Holdings
Inactive entities should not hold any tangible or intangible assets, whether in the United States or abroad. This includes ownership interests in other legal entities like corporations, limited liability companies, or similar entities.
Does Your Business Qualify for Corporate Transparency Act Exemptions?
An entity that meets all these conditions is exempt from the beneficial ownership information (BOI) reporting requirements. The CTA’s recognition of inactive entities is important because it acknowledges that not all legal entities have the same level of complexity or potential risk for illicit activities. Inactive entities, by their nature, are less likely to be involved in activities that the CTA seeks to regulate, such as money laundering, fraud, or other financial crimes. Therefore, they are granted exemption to reduce the compliance burden on such entities.
Are You Prepared to File?
Ultimately, this exemption is extremely narrow and not many entities will be eligible for exemption under these rules. For businesses that do meet the criteria of inactive entities, it is essential to keep accurate records to demonstrate compliance with these conditions. Business owners and operators of such entities should be mindful of these requirements and consult a professional to confirm their exempt status.
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