What this is: The Corporate Transparency Act (CTA) is aimed primarily at for-profit entities. However, nonprofits have been affected by the law, given its potential impact on their formation, governance and operations.
What this means: This article will examine how the CTA has affected nonprofits as well as specific exemptions for nonprofit organizations.
The Corporate Transparency Act (CTA), enacted by Congress in 2021, represents a transformative shift in financial transparency laws by providing law enforcement with access to beneficial ownership information (BOI). Its primary aim is to address financial crimes such as money laundering, terrorism financing and corruption, which often exploit shell companies to obscure illicit financial transactions. Historically, smaller companies, including limited liability companies (LLCs) and corporations, faced fewer reporting requirements than publicly traded companies. This lack of transparency facilitated the concealment of financial activities linked to illicit activities. The CTA mandates that certain entities (including corporations, LLCs and similar entities) disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau within the US Department of the Treasury. A "beneficial owner" is defined as an individual who owns at least 25% of the company or has substantial control over it.
While the CTA's primary focus is on for-profit businesses, nonprofits have been affected by the law, given its potential impact on their formation, governance and operations. It has also raised questions about exemptions, reporting obligations and uncertainties, particularly regarding entities in transition or those with for-profit subsidiaries. Additionally, there are specific exemptions for nonprofit organizations, particularly those classified under section 501(c) of the Internal Revenue Code.
Nonprofits, particularly tax-exempt organizations, are largely exempt from the CTA’s reporting requirements. The law includes an exemption for entities recognized as tax-exempt by the IRS under section 501(c) of the Internal Revenue Code. This includes organizations such as 501(c)(3) charities, 501(c)(4) social welfare organizations, 501(c)(6) trade associations, political organizations under section 527(a) and trusts described in 4947(a). These organizations are not required to disclose their beneficial ownership to FinCEN if they meet the criteria for tax-exempt status.
However, the exemption does not necessarily extend to all organizations operating as nonprofits. For example, nonprofits that are in the process of obtaining IRS tax-exempt status or are waiting for formal approval may face uncertainty.
One of the key challenges nonprofits face under the CTA is the timing gap between the formation of an organization and its receipt of formal IRS recognition as a tax-exempt organization. The CTA mandates that beneficial ownership information be filed within 90 days of a company’s formation. Note though, nonprofits created on or after January 1, 2025 have 30 days from their creation to file their BOI reports with FinCEN. For nonprofits, particularly 501(c)(3) organizations, this presents a problem because it usually takes several months for the IRS to approve their tax-exempt status.
If a nonprofit is formed but does not have its tax-exempt status confirmed by the IRS within the 90-day filing window (30 days in 2025), it may still be required to submit beneficial ownership reports to FinCEN. In such cases, the nonprofit could amend its filing once it receives its formal IRS determination. While FinCEN has indicated that nonprofits applying for tax-exempt status in good faith will not be penalized under the CTA, this uncertainty creates challenges for nonprofits who may have to deal with the potential of filing reports prematurely and amending them later.
For 501(c)(3) organizations, this issue is compounded by the fact that IRS approval is a prerequisite for tax-exempt status. On the other hand, some other types of nonprofit organizations, such as 501(c)(4) entities, can self-declare their tax-exempt status. This self-declaration process could simplify compliance under the CTA, as these organizations would automatically qualify for the exemption.
However, because the CTA does not require nonprofits to have IRS acknowledgment to qualify for the exemption, some experts argue that an official IRS determination letter may not be a prerequisite for exemption. Nonetheless, some nonprofits in this uncertain position may choose to err on the side of caution and submit beneficial ownership reports to avoid potential noncompliance.
Also, note that organizations that lose their IRS tax exemption continue to be exempt from the CTA filing requirements for 180 days. If the tax exemption is not reinstated during this grace period, then the nonprofit has 30 days to file a beneficial ownership report.
Another important consideration for nonprofit organizations under the CTA is the treatment of subsidiaries. While tax-exempt organizations are largely exempt from the CTA’s reporting requirements, subsidiaries that are not wholly owned or controlled by the tax-exempt entity may not be eligible for the same exemption. If a nonprofit organization operates a for-profit subsidiary or a related entity that is not fully under the control of the nonprofit parent organization, the subsidiary may be subject to the CTA’s beneficial ownership reporting requirements.
If a nonprofit owns 30% of a for-profit subsidiary, with the remainder owned by private individuals or entities, the subsidiary will be required to report beneficial ownership information, including the name of the nonprofit as an owner. However, if a nonprofit owns a for-profit subsidiary entirely and exercises full control, such as a single-member LLC, the CTA exemption would extend to the subsidiary as well. Nonprofits must carefully consider their ownership structure and governance relationships to ensure that subsidiaries comply with the CTA.
The CTA has faced legal challenges, and as of December 2024, a US District Court in Texas issued a preliminary injunction temporarily halting the enforcement of the CTA. This decision was appealed and on December 26, 2024, the Fifth Circuit Court of Appeals upheld the injunction. Therefore, as of December 26, 2024, and for as long as the injunction remains in force, Beneficial Ownership Information reporting under the CTA is voluntary. If the Court’s decision is upheld, nonprofits and other entities would likely have additional time to adjust to the law's requirements, especially if the case is appealed to the US Supreme Court.
Nonprofits should stay informed about the progress of the litigation and seek legal advice to ensure they are prepared for compliance if the injunction is lifted. The outcome of this case could significantly affect the CTA’s implementation, and nonprofits should remain vigilant in monitoring the situation.
The CTA has significant implications for nonprofit organizations, especially those navigating the complexities of tax-exempt status. While most nonprofit entities are exempt from the CTA’s reporting requirements, uncertainties persist, particularly for newly formed organizations or those with subsidiaries that are not under their full control. The potential for confusion regarding compliance and subsidiary ownership highlights the need for nonprofit leaders to stay informed and seek guidance from trusted advisors on the law’s evolving application.
Nonprofit constituent relationship management system (CRM): Your nonprofit’s CRM will help track donor information, including names, giving histories, contact information, communication preferences, relationships with staff members or board members and other personal data. This will help you build relationships with potential donors and design personalized outreach based on data. To learn more, head on over to our article, What Do You Need to Start a Nonprofit? The Free Checklist.
The case, Texas Top Cop Shop, Inc. v. Garland, Civil Action No. 4:24-CV-478, 2024 U.S Dist. LEXIS 218294 (E.D Tex. Dec. 3, 2024), was brought by a group of plaintiffs challenging the constitutionality of the CTA and seeking a court order preventing FinCEN from enforcing the CTA while the issue of the CTA’s constitutionality is being litigated. To read more, visit our article, The Corporate Transparency Act Under Fire.
Religious organizations aside (if they are not required to file any version of the IRS Form 990), most nonprofits must register to solicit charitable donations, especially if they are fundraising in multiple states. There are often broad exemptions in many states for small organizations that raise less than $25,000 per year as well as for educational institutions, hospitals and political and/or membership organizations. Refer to our article, Top 10 Charitable Solicitation Registration FAQs From Nonprofits, for more information.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.