Corporate Transparency Act: What Entities Are Required to Report?

The Corporate Transparency Act (CTA) is an effort to ensure businesses operating in the United States are legitimate entities. It requires many companies to provide ownership and other identifying information.

 

The Corporate Transparency Act was enacted on January 1, 2021. Part of broad anti-money laundering and antiterrorism measures taken by Congress, it takes effect January 1, 2024. The CTA requires certain entities to report (among other things) “beneficial ownership information” (BOI) to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

 

This series looks at key elements of the CTA. First, what is a “reporting company”? What entities are exempt from CTA reporting?

 

 

Is Your Entity a “Reporting Company” Under the CTA?

All companies that fall within the scope of “reporting company” under the CTA and do not fall under an exemption will be required to report information about the entity’s owners to FinCEN. These companies include both domestic reporting companies and foreign reporting companies. Unlike certain reporting obligations imposed by federal securities laws, the CTA’s obligations for reporting BOI fall on the company itself, not the beneficial owner.

 

A domestic reporting company is a corporation, limited liability company, or other entity created by filing a document with a secretary of state or similar office in the United States, District of Columbia, or U.S. territories, or with the office of an Indian tribe.

 

A foreign reporting company is an entity formed under the laws of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or similar office.

 

It is expected that (in addition to corporations and LLCs) the other types of entities that are likely to be reporting companies under the CTA will also include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships because these entities are generally created by a filing with a secretary of state or similar office.

 

It is also likely that this definition will mean that sole proprietorships, most general partnerships, or other entities not created by a filing with a secretary of state or similar office will not be reporting companies. Therefore, with very few exceptions, nearly all business entities conducting business in the United States will be considered reporting companies unless they meet one of the exemptions under the CTA.

 

What Are CTA Exemptions to “Reporting Company”?

The CTA specifically exempts 23 categories of entities from the definition of “reporting company.” In this article we will discuss three exemptions that we expect many private, non-regulated businesses will be most interested in. A summarized list of all of the exemptions is at the end of this article.

 

What Is the CTA’s Large Operating Company Exemption?

To qualify under the “large operating company” exemption an entity must meet all of the following requirements:

• Employ more than 20 full-time employees in the United States;
• Have an operating presence at a physical office in the United States; and
• Have greater than $5 million in gross receipts or sales (net of returns and allowances) from sources in the United States on its federal tax return for the previous tax year of the entity.

 

For purposes of meeting the large operating company exemption, a full-time employee is anyone employed an average of at least 30 hours per week or 130 hours per month. Further, the entity must be the employer of the 20+ full-time employees; entities may not consolidate employees across affiliated entities for CTA purposes.

 

The operating presence in the United States must be at a physical location (having a P.O. box or other principal address where no business is conducted will not be sufficient) owned or leased by the exempt entity and may not be shared (except with the entity’s affiliates).

 

Unlike the employment requirement, an entity that is part of an affiliated group that files a consolidated tax return is permitted to aggregate the entirety of the affiliated group’s gross receipts/sales requirement for purposes of meeting the gross receipts/sales requirement.

 

However, the requirement specifically references that the $5 million test is determined based on the entity’s previous tax year’s tax return. Until the entity has a tax return meeting the requirement, it will not be able to take advantage of the large operating company exemption.

 

Further, this requirement specifically states that the source of receipts/sales must come from business conducted within the territorial boundaries of the United States, so any receipts/sales received by an entity outside of the United States will not be able to be included for purposes of meeting this requirement.

 

Businesses meeting the large operating company exemption should be wary. Should the entity no longer meet the requirements at any time (such as if the business no longer employs 20 full-time employees or sees U.S. gross receipts/sales dip below $5 million), the entity will no longer qualify for the large operating company exemption. If the entity does not fit under any other exemption, it will be required to file a BOI report with FinCEN within 30 days from the date the entity no longer is exempt.

 

What Is the CTA’s Nonprofit Entity Exemption?

Tax-exempt entities are also exempt from the reporting requirements of the CTA. This includes:

• Nonprofit organizations described in Section 501(c) of the Internal Revenue Code (IRC) and tax-exempt under IRC Section 501(a);
• Political organizations tax-exempt under IRC Section 527(a); and
• Trusts described in IRC Sections 4947(a)(1) and (2).

 

Additionally, entities assisting tax-exempt entities are also exempt from the CTA’s definition of “reporting company.” This exemption applies to entities that:

• Operate exclusively to provide financial assistance to, or hold governance rights over, any tax-exempt entities that are excluded entities;
• Are United States persons;
• Are beneficially owned or controlled exclusively by one or more United States persons; and
• Derive a majority of their funding or revenue from one or more United States persons.

 

When seeking to qualify for an exemption involving tax-exempt status, entities need to be aware of potential CTA reporting obligations during the period after formation of the entity but before the entity receives its tax-exempt status from the Internal Revenue Service. During this period, unless the entity falls under another of the CTA’s exemptions, the entity will be required to file a BOI report with FinCEN.

 

What Is the Subsidiary Exemption Under CTA?

A third exemption to the CTA’s definition of “reporting company” is for subsidiaries of exempt entities. Entities owned directly or indirectly by one or more entities meeting an exemption to the definition of reporting company are also exempt. However, such subsidiaries will not qualify for the subsidiary exemption if the parent entity or entities are themselves only exempt under the CTA’s exemptions for:

• pooled investment vehicles,
• money transmitting or money services businesses,
• entities assisting tax-exempt entities, or
• inactive entities.

 

An example of an entity qualifying for this exemption would be a subsidiary of a large operating company. The parent company (the large operating company) would itself be exempt from the “reporting company” definition, and therefore, its subsidiary will be exempt as well.

 

However, if the subsidiary is not owned entirely by one or more exempt entities, it will not be exempt under the subsidiary exemption. For example, if an exempt entity owns 99.99 percent of the subsidiary and an individual or other non-exempt entity owns just .01 percent of the subsidiary, the subsidiary will not qualify under this exemption.

 

What Are the Exemptions to the “Reporting Company” Definition?

The CTA provides many exemptions to its definition of “reporting company.” In addition to those previously discussed, here is a summary of all exemptions provided under the CTA. For each exemption, the detailed requirements to meet such exemption are included at 31 U.S.C. § 5336(a)(11)(B).

 

• Publicly traded companies
• Inactive entities
• Investment companies or investment advisers registered with the SEC
• Venture capital fund advisers
• Pooled investment vehicles
• Insurance companies and insurance producers
• Public accounting firms
• Governmental authorities
• Other highly regulated entities:
  • Banks
  • Federal and state credit unions
  • Bank holding companies
  • Money transmitting businesses and money service businesses registered with FinCEN
  • Securities brokers or dealers registered with the SEC
  • Exchange or clearing agencies registered with the SEC
  • Other entities registered with the SEC
  • Entities registered under the Commodity Exchange Act
  • Regulated public utilities
  • Financial market utilities
• Large operating companies
• Nonprofit companies
• Subsidiaries of other exempt entities

 

Read more about the CTA, beneficial ownership information, and other compliance requirements at Nyemaster’s Corporate Transparency Act Information Hub.

 

Examine more details of the CTA with each article in the series:

• Who Is a Beneficial Owner? 
• Who Is a Company Applicant?
• What Information Needs to be Reported?
• When Are Filing Dates and What Are the Penalties?

 

For legal advice on the CTA and the obligations it imposes on businesses, please contact your Nyemaster attorney.