Although you have probably been bombarded with news about the Corporate Transparency Act which is set to take effect on January 1, 2024, its actual impact for most operational companies in the U.S. will likely be significantly less than the hype that has surrounded it. This is because of the broad exemptions which are baked into the Act. The new law is part of the efforts of the U.S. to crack down on money laundering. The corporate laws of most U.S. states do not require corporations or limited liability companies to identify the owners of those entities. This has made the policing of money laundering difficult for the U.S. Treasury Department. For that reason, the Act will require the disclosure of the identity of the beneficial owners of corporations, limited liability companies and partnerships which do not fall under one of the exemptions. As existing companies will have until the end of 2024 to make the disclosure, and the Department of Treasury is still working on many of the details, our advice at this time is to identify whether your company benefits from one of the exceptions.

Which types of legal entities fall within the scope of the Act?

The general rule is that all U.S. corporations, LLCs, limited partnerships or other entities created by the filing of a document with a secretary of state or any similar office under the law of a U.S. state potentially have to file a report disclosing their beneficial owners. The U.S. Treasury Department has indicated that entities which are not created through the filing of a document with a secretary of state such as sole proprietorships, certain types of trusts, and general partnerships fall outside the scope of the Act. 

Does the Act also apply to companies from outside the United States?

Yes. Non-US companies will also have to report under the Act if they are registered to do business in a U.S. state. 

How do I know whether my company falls under one of the exemptions?

The Act identifies 23 categories of companies who will be exempt from the reporting obligation. Rather than discussing each of these categories, we are identifying the broadest categories which will likely relieve most of our clients from having to report under the Act.

• Public companies whose shares are registered under the Securities Exchange Act or required to file periodic information under the Securities Exchange Act are exempted from the reporting requirement.
• Operating companies (even privately-held) are exempt from the reporting obligation if they meet three requirements:

(1) have over more than 20 full-time employees in the U.S. (caution: this is determined at the entity level and not the group level); and

(2) have an operating presence at a physical office within the U.S.; and

(3) reported more than $5 million in gross U.S. sales on its prior year federal tax return (if the entity is part of an affiliated group, it can use the U.S. sales from the group’s consolidated return).

If my company is part of a larger corporate group, do I have to determine whether each entity within the corporate group qualifies for the exemption?

Generally, yes. However, there are two important rules to keep in mind:

First, entities in the corporate group directly or indirectly controlled by an exempt entity, are automatically exempted. Entities within the corporate group above the exempt entity will have to report unless they qualify for an exemption.

Second, when calculating the number of employees of a particular entity for purposes of the operating-company exemption, you cannot consolidate the number of employees. The determination of the number of employees is made at the entity level, not at the group level (in contrast to the sales). For example, if the sole member of a large operating limited liability company with 1000 employees in the United States is a holding company with no employees, that holding company will not benefit from the operating-companies exemption.

What if my company does not fall under either of these exemptions?

If your company does not fall under either of these exemptions, don’t assume that you have to report. Have a look at the Treasury Departments FAQs (Beneficial Ownership Information Reporting | FinCEN.gov) or give us a call. There are other exemptions specifically applicable to:

• investment companies and investment advisers

• pooled investment vehicles
• insurance companies
• banks and credit unions
• securities brokers or dealers
• public utilities
• tax-exempt entities and trusts