A new federal law went into effect and likely will affect many business entities in Wisconsin and the United States, and in particular, many small businesses that may not even be aware of the new law. The Corporate Transparency Act (CTA) was enacted on January 1, 2021, as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act and went into effect on January 1, 2024.    

What is the CTA?

The CTA was enacted to combat money laundering and terrorism, and to create a central register of entity ownership information to assist with these combative efforts. The CTA requires any qualifying entity to report information to the Financial Crimes Enforcement Network (FinCEN) about itself, each of its qualifying beneficial owners, and for any recently created entity, its company applicants. For entities created or registered to do business in the United States before January 1, 2024, the CTA filing is due by December 31, 2024. Newly created or registered entities created in 2024 have 90 calendar days to file after notice that their company’s creation or registration is effective. For instance, if you formed a new limited liability company with the Wisconsin Department of Financial Institutions in 2024, your CTA filing is likely due 90 days after filing of the Articles of Organization, unless that entity meets certain exemptions.

Under the CTA, many entities will be required to report the identity and certain personal information of: (1) individuals that directly or indirectly own twenty-five percent (25%) or more of the entity’s interests; and (2) individuals who directly or indirectly have substantial control of the entity such as the managing member or manager of a limited liability company as identified in the entity’s operating agreement. In addition, entities formed on or after January 1, 2024, will need to identify and report certain personal information about the individuals involved in the entity formation. For a Wisconsin limited liability company, this individual would typically be the person identified as the Organizer in the Articles of Organization.

The CTA names 23 entity types that are exempt from this reporting requirement. These exempt entity types include, but are not limited to, banks, insurance companies, publicly traded companies, nonprofits, certain large operating companies, and some inactive entities formed on or before January 1, 2020. Moreover, in order to qualify as a large operating company exempt under the CTA, the entity must have (1) at least 20 full-time employees, (2) an operating presence at a physical office within the United States that is either owned or leased by them, and (3) more than $5,000,000 in gross receipts or sales as shown on its previous year’s Federal income tax return. In other words, most small business entities will be required to file under the new CTA.

How Do I Count My Employees?

One question that has come up is what constitutes an employee for the purposes of the CTA and meeting the large operating company exemption requirements described above. All qualifying employees must be full-time employees working at least 30 hours per week or 130 hours per month on average as directed by the Treasury Regulations. Qualifying employees cannot include leased employees, sole proprietors, partners in a tax partnership, 2% S corporation shareholders, real estate agents, direct sellers, or full-time equivalent employees. Also, the employee threshold must be met on an entity-by-entity basis without any aggregation across affiliates.  In other words, for business owners of a parent company with employees working at multiple entities such as restaurants, hotels, or family entertainment centers, the aggregate number of hours an employee works among those entities cannot be counted toward the full-time employee exemption for the parent company under the CTA. The exemption requires that the entity itself employ 20 full-time employees. If at any point, the number of full-time employees decreases below the exemption threshold of 20 full-time employees, then the entity would need to report.

Bottom Line

As it stands right now, unless Congress or the judiciary take action prior to December 31, 2024, the reporting obligation will fall on most small businesses and other entities organized as a corporation or limited liability company. We recommend you reach out to your legal counsel to learn more about the CTA and your potential reporting requirements under this new federal law.

This article, slightly modified to note recent updates, was featured online in the Wisconsin Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.