Beginning on January 1, 2024, the Corporate Transparency Act (the “CTA”) will require all “Reporting Companies” to report to the federal Financial Claims Enforcement Network (“FinCEN”) information about their “beneficial owners” and “company applicant’s (“BOI Reports”). The statutory definition of a reporting company is short. According to the CTA, a reporting company is a corporation, limited liability company, or other similar entity that is created (a “Domestic Reporting Company”) or in the case of any foreign entity, registered to do business, (a “Foreign Reporting Company”) by filing a document with a Secretary of State or similar office under the law of any U.S. State or Indian Tribe.

What You Need to Know:

• Will your enterprise be required to file beneficial ownership reports under the CTA next year?
• Do any of the exemptions apply to you?
• Look out for critical shifts in your business to identify changes in reporting status that impose reporting obligations on both entities and individuals.

As January 1 approaches, the question most frequently asked by clients is whether their companies are “Reporting Companies.” The answer whether (and when) an entity qualifies as and must file as a Reporting Company is clear in some cases, but more complex in others. Existing Reporting Companies created on or registered to do business before January 1, 2024 must file their initial BOI reports by January 1, 2025. Reporting Companies created or registered after January 1, 2024 must file an initial BIO Report within 30 calendar days of the earlier of (1) the date of receipt of actual notice of the entity’s creation or registration; or (2) the date of first public notice provided by the applicable secretary of state or similar office.

Although the Reporting Company definition is sweeping, the CTA carves out 23 exemptions. These exemptions, in summary, are as follows:

• Securities reporting issuers
• Governmental authorities
• Banks
• Credit unions
• Depository institution holding companies
• Money services businesses
• Brokers or dealers in securities
• Securities exchanges or clearing agencies
• Other Exchange Act registered entities
• Investment companies and investment advisers
• Venture capital fund advisers
• Insurance companies
• State-licensed insurance producers
• Commodity Exchange Act registered entities
• Accounting firms
• Public utilities
• Financial market utilities
• Pooled investment vehicle
• Tax-exempt entities
• Entities assisting a tax-exempt entity
• Large operating companies
• Subsidiaries of certain exempt entities
• Inactive entities 

Many of the CTA Reporting Entity exemptions are tied to existing, often complex, areas of U.S. law requiring similar governmental reporting or disclosure obligations. Accordingly, the analysis whether an entity may avail itself of a CTA exemption often requires more than a close read of the CTA; indeed, exempt status determinations will, in many cases, require a working understanding of the other statutory framework upon which the exemption is based. For example, certain exemptions rely on definitions in and portions of the Securities Exchange Act of 1934 (the “‘34 Act”), the Investment Advisers Act of 1940 (the “‘40 Act”), the Internal Revenue Code and other complex legal frameworks.

The following is a more detailed explanation of the 23 exemptions:

• Large Operating Companies and Certain Subsidiaries:
  • Large Operating Companies: These are entities that employ more than 20 employees on a full-time^[1] basis in the United States; that filed in the previous year a U.S. federal income tax return demonstrating more than $5 million in gross receipts or sales, in the aggregate, including the receipts or sales of other entities owned by the entity and other entities through which the entity operates;^[2] and that have an operating presence at a physical office within the United States (the “Large Business Exemption”).^[3]
  • Subsidiary Entities of Certain Exempt Entities: These entities include any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled, directly or indirectly by one or more entities that qualify for the Large Business Exemption (the “Subsidiary Exemption”).
• Governmental Authorities: 
  • Entities established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State under an interstate compact between two or more States and that exercises governmental authority on behalf of the United States or at any such Indian Tribe or political subdivision.
• Financial Institutions:
  • Banks^[4] and bank holding companies.^[5]
  • Federal or State Credit Unions, as those terms are defined in Sec. 101 of the Federal Credit Union Act. 
  • Certain money transmitting businesses registered with the Secretary of the Treasury.^[6]
• Regulated Issuers, Advisors and Exchange-Associated Entities:
  • Broker or dealer that is registered under Section 15 of the ‘34 Act. 
  • Certain exchange or clearing agencies as defined in the ‘34 Act that is registered under Secs. 6 or 17A of that ‘34 Act.
  • An issuer of a class of securities registered under Section 12 of the ’34 Act or that is required to file supplementary and periodic information under Section 15(d) of the ‘34 Act. 
  • Certain venture fund advisors.^[7] 
  • Certain entities not described above that are registered with the S.E.C. under the ‘34 Act.
  • Investment companies.^[8]
  • Commodity Exchange Act registered entities, including: any futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, or retail foreign-exchange dealer.
• Regulated Insurance Entities:
  • Insurance companies.^[9]
  • An insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or similar official or agency of the State and that has an operating presence at a physical office within the United States. 
• Other Regulated Enterprises:
  • Public accounting firms registered in accordance with Section 102 of the Sarbanes-Oxley Act.^[10] 
  • Public utilities that provide telecommunications services, electrical power, natural gas, or water and sewer services within the United States.^[11] 
  • Financial market utilities designated by the financial stability oversight council.^[12] 
  • Pooled investment vehicles.^[13] 
• Tax-Exempt Entities:
  • Any entity that is: (A) an organization that is described in Sec. 501(c) of the Internal Revenue Code of 1986 (the “Code”) (determined without regard to Sec. 508(a) of the Code) and exempt from tax under Sec. 501(a) of the Code, except that in the case of any such organization that ceases to be described in Sec. 501(c) and exempt from tax under Sec. 501(a), such organization shall be considered to continue to be described as a tax-exempt entity for the 180-day period beginning on the date of the loss of such tax-exempt status, (B) a political organization, as defined in Sec. 527(e)(1) of the Code, that is exempt from tax under Sec. 527(a) of the Code, or (C) a trust described in paragraph (1) or (2) of Sec. 4947(a) of the Code. Political Organizations, as defined in Section 527(e)(1) of the Code.
  • Trusts described in paragraph 1 or 2 of Section 4947(A) of the Code.
  • Entitles Operated to Provide Assistance to or Operate 501(c) or 527(e) Organizations.
  • A corporation, limited liability company, or other similar entity that operates exclusively to provide financial assistance to, or hold governance rights over, any 501(c) or 527(e) organization.
• Inactive Entities: Any entity in existence for over one year that is not engaged in active business; that is not owned, directly or indirectly, by a foreign person; that has not, in the preceding 12-month period experienced a change of ownership or has sent or received funds in an amount greater than $1000; and does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity.

Other entities may, in the future, be specifically exempted by the Secretary of the Treasury by regulation, if it is determined that they should be exempt from the reporting requirement because requiring beneficial ownership information regarding the entity or class of entities would not serve the public interest and would not be highly useful in national security, intelligence, or law enforcement agency efforts to detect, prevent, or prosecute money-laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes. 

For many companies, the focus will be on the Large Business Exemption and the Subsidiary Exemption. The application of each of these exemptions is, in many respects, unclear or creates burdens.

For example, with respect to the Large Business Exemption, because it relies on a federal tax return “filed in the previous year,” no new business will be able to rely on it and thereby avoid filing a report. Secondly, because gross receipts and sales may fluctuate from year to year, the question of whether a previously exempt entity remains exempt will have to be monitored on a year-to-year basis. FinCEN has said that it does not consider this monitoring obligation to be burdensome. 

Likewise, in the case of any entity seeking to rely on the Subsidiary Exemption, the application of this exemption is opaque. According to FinCEN’s comments to the final regulations issued under the CTA, “controlled” or “owned” does not mean “wholly” controlled or owned or even “majority” owned or controlled. This, of course, provides some latitude since something less than 100 percent ownership is required in order for an entity to qualify for the exemption. However, the regulations do not provide guidance with regard to where the line is drawn; and so it will be up to each putative subsidiary to determine whether ownership or control by a parent is sufficient for the putative subsidiary to qualify for the exemption.

The analysis will be particularly challenging for subsidiaries of ‘large operating companies’ within the context of private equity, venture-backed, and other structured organizational enterprises. It is also unclear how the subsidiary rules will impact non-wholly owned subsidiaries of public companies or qualified insurance entities.

As a caveat, FinCEN has said that it “takes seriously the need to ensure that no exemption is misused” and that it will monitor the application of the exemptions of the “large company exemption,” that it remains vigilant against potential abuses, but that it will evaluate the need for further guidance. 

[1] “Full-time employee in the United States” has the meaning provided in 26 CFR 54.4980H–1(a) and 54.4980H–3, except that the term “United States” as used in 26 CFR 54.4980H–1(a) and 54.4980H–3 has the meaning provided in Section 1010.100(hhh).

[2] For an entity that is part of an affiliated group of corporations within the meaning of 26 USC § 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group.

[3] Filed on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120–S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under federal income tax principles.

[4] As defined in: (A) Sec. 3 of the Federal Deposit Insurance Act, (B) Sec. 2(a) of the Investment Company Act of 1940, or (C) Sec. 202(a) of the Investment Advisers Act of 1940.

[5] As defined in Sec. 2 of the Bank Holding Company Act of 1956, or any savings and loan holding company as defined in Sec. 10(a) of the Home Owners' Loan Act.

[6] Any money transmitting business registered with FinCEN under 31 U.S.C. 5330, and any money services business registered with FinCEN under 31 CFR 1022.380.

[7] (A) is described in section 203(l) of the Investment Advisers Act of 1940, and (B) has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.

[8] As defined in Sec. 3 of the Investment Company Act of 1940, or is an investment adviser as defined in Sec. 202 of the Investment Advisers Act of 1940, and (B) registered with the SEC under the Investment Company Act of 1940 or the Investment Advisers Act of 1940.

[9] Any insurance company as defined in Sec. 2 of the Investment Company Act of 1940.

[10] The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. 

[11] As defined in 26 USC 7701(a)(33)(A) that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.

[12] Under Sec. 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.

[13] Operated or advised by a person described in exemptions for bank), 4 (credit union), 7 (broker or dealer in securities), 10 (investment company or investment adviser), or 11 (venture capital fund adviser).