The Corporate Transparency Act (CTA) went into effect January 1, 2024, imposing significant reporting obligations for millions of privately held entities, called Reporting Companies. As the CTA was designed to increase transparency in corporate structures to combat tax fraud, money laundering, and other illegal activities, Reporting Companies must report company ownership information to the Financial Crimes Enforcement Network (FinCEN), a division under the U.S. Treasury.

What is a Reporting Company?

Generally, Reporting Companies include any corporation, limited liability company, or other similar entity created by filing documentation with the secretary of state or similar office of any U.S. state or territory, or formed under the laws of a foreign country and registered to do business in the U.S.  Following the CTA reporting obligations will therefore cover most entities.  However, there are 23 exceptions to the definition of Reporting Company that may apply, and guidance should be sought as to whether your company qualifies for an exception.

Applicability to ESOPs.

Many ESOP-owned companies will fall under one of the CTA’s 23 enumerated exceptions with many likely to fall under the very common “Large Operating Company” exception to the definition of Reporting Company and will not need to file a Beneficial Ownership Information Report (BOI Report) with FinCEN.  In order to meet the requirements to be considered a Large Operating Company, the ESOP-owned company must satisfy all of the following requirements: 

• More than 20 full time employees employed in the US;
• Operating presence and physical location in the US; and
• Federal income tax return filed for the previous year demonstrating greater than $5 Million in gross receipts/sales, including gross receipts and sales of subsidiaries but excluding revenue from outside of US.

However, many ESOP-owned companies have a corporate structure that includes a “holding company” wherein the ESOP’s Trust owns the shares of the holding company which, in turn, owns all of the ownership interests in the operating subsidiaries. The holding company typically has only the limited required employees by law but serves as the Plan Sponsor of the ESOP covering the employees of the operating subsidiaries. If the ESOP-owned holding company itself does not have more than 20 employees, then it will not qualify for the Large Operating Company exception and, unless it can qualify for another exception, will be considered a Reporting Company required to file a BOI Report with FinCEN.

What If An ESOP-owned Company Must Report?

Beneficial Ownership analysis for purposes of the CTA must be conducted on a case-by-case basis. For companies owned 25% or more by an ESOP, the trustee of the ESOP Trust is likely a Beneficial Owner for CTA reporting purposes.  Issuance of warrants to selling shareholders in the sale of shares to an ESOP is common, and such selling shareholders may also be considered Beneficial Owners if they were issued more than 25% of the fully diluted equity of the entity in the form of warrants or hold a combination of warrants and stock accounting for more than 25%.

Furthermore, consideration should be paid to the allocation of shares to participant accounts in the ESOP as well. Unless there are very few employees of the participating employers in the ESOP, it is unlikely that any individual plan participant would own more than 25% of the allocated shares of an ESOP solely through the plan. Therefore, it’s unlikely that individual ESOP participants will be subject to Beneficial Ownership reporting (unless they exert control over the entity in some other way, such as holding an officer or director position or if they hold warrants or some other ownership interest in the entity).

Reporting Companies must file a BOI Report that will include its legal name, any trade name(s), principal place of business, jurisdiction of formation or registration, and tax identification number. In addition, with respect to each Beneficial Owner (which will likely include ESOP Trustees), the company must report the name, date of birth, address, and unique identifying number from an acceptable document (e.g., driver’s license or passport) or such Beneficial Owner’s unique FinCEN identification number—which is highly advisable to obtain, especially for ESOP Trustees that may be Beneficial Owners for multiple ESOP-owned Reporting Companies.

When Must Beneficial Ownership Be Reported to FinCEN?

Reporting Companies created in 2024 will have 90 days to file beneficial ownership information with FinCEN. Reporting Companies already in existence prior to 2024 will have until December 31, 2024, to file.

Future changes to beneficial ownership information of Reporting Companies must be reported to FinCEN within 30 days of the change becoming effective. Additionally, corrections to previously filed reports must be reported within 30 days of becoming aware of or having reason to know of an inaccuracy.