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:
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:
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:
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.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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