Who Is Subject To the Corporate Transparency Act

As we discussed in part one of this series, the Corporate Transparency Act is in effect as of January 1, 2024, requiring that private companies report information about their beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

Who must comply with this new law, and what exactly are beneficial owners? Those questions are the subject of this blog post.

What is a reporting company?

The Corporate Transparency Act applies to any “reporting company” that is not covered by one of the listed exemptions. Reporting companies may be either domestic or foreign.

A domestic reporting company is an entity whose creation required filing a document with a secretary of state or comparable state or tribal official. This includes corporations, LLCs, and most limited liability partnerships.

A foreign reporting company is an entity formed in another country that has registered to do business in the United States by filing a document with a secretary of state or comparable state or tribal official.

If a business or partnership has been created without filing an official state or tribal document, it is not a reporting company under the Corporate Transparency Act, and it need not file a beneficial ownership information (BOI) report with FinCEN.

The Corporate Transparency Act is particularly targeted to small businesses that may have previously avoided government scrutiny. The Small Business Administration reports that there are over 27 million “nonemployer firms” across the United States that do not employ anyone. Those that were formed by filing a document with a state corporation commission or similar authority are subject to the Corporate Transparency Act unless an exemption applies.

Let’s turn now to what those exemptions are.

What companies are exempt from the Corporate Transparency Act?

The Corporate Transparency Act spells out 23 types of exempt entities. These can be sorted into four broad groups.

First, “large operating companies” are those business entities that meet the following criteria:

• Have more than 20 full-time employees in the U.S.
• Maintain an operating presence at a physical office within the U.S. (i.e., regularly conducts business at a physical location in the U.S. that the entity owns/leases and that is physically distinct from the place of business of any unaffiliated entity (not a shared office space like WeWork))
• Reported more than $5 million in gross receipts or sales, excluding sales generated from outside the U.S., on the previous year’s federal tax filing

The second major type of exemption is for “inactive entities,” those businesses that used to exist but are no longer operational. Specifically, inactive entities meet all of these criteria:

• Existed on or before January 1, 2020
• Do not have any direct or indirect foreign ownership interests
• Have not had a change in ownership in the previous 12 months
• Are not engaged in active business
• Do not hold any assets
• Have not sent or received funds, directly or indirectly through any associated financial account, in an amount greater than $1,000 in the previous 12 months

The third group exempts those business entities that are already subject to substantial federal government regulation or entities, such as many nonprofits, that are tax-exempt. This group includes, but is not limited to, the following:

• Governmental authorities
• Public utilities companies
• Financial institutions such as banks and credit unions
• Securities brokers, dealers, exchanges, clearing agencies, and reporting issuers
• Investment companies and advisors, including venture capital fund advisers
• Accounting firms
• Certain entities that are tax-exempt under section 501(c) of the Internal Revenue Code

Finally, those entities that are subsidiaries of certain exempt entities may themselves be exempt from the Corporate Transparency Act.

Once you’ve determined whether your business must comply with the Corporate Transparency Act, there’s another major “who” question to answer: who are the beneficial owners you must report?

Who is a beneficial owner under the Corporate Transparency Act?

A beneficial owner is defined as an individual who, directly or indirectly does one of the following:

• Exercises substantial control over the reporting company
• Owns or controls at least 25% of the reporting company’s ownership interests

Those terms are construed broadly under the law. For example, an individual exercises “substantial control” if they have “a major influence on the reporting company’s decisions or operations.” This includes senior executives and anyone else who makes or substantially influences the reporting company’s “important decisions,” such as defining the nature and scope of the business, buying or selling assets or investing funds, or determining how the business is structured or managed.

Similarly, “ownership interest” is intended to capture all ownership options, such as capital or profit interest, equities, stocks, futures, options, and any other mechanism through which an individual’s ownership is established.

What if a separate business entity owns or controls at least 25% of the reporting company? The Corporate Transparency Act is intended to reveal the people funding or controlling businesses. Therefore, FinCEN has clarified that the reporting company “should not report the corporate entity that acts as an intermediate for the individuals” but should instead report the individuals themselves, with very limited exceptions.

In short, those individuals who influence the reporting company’s business operations — or who could — should likely be reported as beneficial owners, unless they fall within a specific exception.

Who doesn’t need to be reported as a beneficial owner?

While the Corporate Transparency Act is designed to clear the opacity of anonymous business ownership, there are a few categories of individuals whose information does not need to be reported to FinCEN. Minors, for example, need not be listed, though the reporting company must report the required information for a parent or legal guardian of that minor child. Individuals who are acting as an intermediary or agent on behalf of another may also be excepted, as may employees whose control over the business entity arise solely from their employment.

We’ll discuss how to calculate ownership interests in part three of this series.

Need help determining whether your business is a reporting company under the Corporate Transparency Act or who its beneficial owners are?

We’ve written a comprehensive blog on the requirements of the Corporate Transparency Act. In an upcoming blog, we’ll review what it takes to comply with the Corporate Transparency Act.

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