The Corporate Transparency Act (CTA) requires “reporting companies” to report certain beneficial ownership information (BOI) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in order to enhance corporate transparency in the United States.

As part two of a series highlighting the material provisions of the CTA, this article discusses the exemptions from reporting requirements in order to assist businesses with CTA compliance.

Exemptions

The CTA specifically exempts 23 types of entities, including the following: issuers of registered securities; banks; credit unions; securities brokers and dealers; investment companies; investment advisors; insurance companies; accounting firms; 501(c)(3) tax-exempt entities; inactive entities; and large operating companies. Each of the 23 exemptions contain specific requirements that an entity must meet in order to qualify for the exemption.  

A company does not need to report to FinCEN that it is exempt from the BOI reporting requirements if it has always been exempt. If at a later date the company no longer meets the criteria for an exemption, the reporting company must file an updated BOI report with FinCEN within 30 days of such status change. If a company filed a BOI report and later qualifies for an exemption, that company should file an updated BOI report to indicate that it is newly exempt from the reporting requirements.

A notable exemption is the large operating company exemption. Under the CTA, a large operating company is any entity that employs more than 20 full time employees in the United States, has an operating presence at a physical office within the United States, and filed a Federal income tax return in the United States for the previous year showing over $5,000,000 in gross receipts or sales, as reported on the entity’s applicable IRS form, excluding gross receipts or sales from sources outside of the United States, as determined under Federal income tax principles. FinCEN has made clear that the large operating company exemption requires the entity itself to employ more than 20 full time employees in the United States and does not allow companies to aggregate employee count across multiple entities. However, if an entity is a member of an affiliated group of corporations that filed a consolidated return, the applicable amount of gross receipts and sales shall be the amount reported on the consolidated return for such group.

For non-exempt entities dissolved after January 1, 2024, FinCEN has advised such entities must still file a BOI report; in other words, regardless of the duration of existence, any reporting company that exists for any period after January 1, 2024 must file a BOI report. However, it is important to also consult the definition of an “inactive entity,” one of the 23 exemptions, which is an entity that was in existence on or before January 1, 2020 but is not engaged in active business, is not owned by a foreign person, has not had a change in ownership in the preceding 12 months, has not sent or received funds in excess of $1,000 directly or through an account which the entity or its affiliate had an interest in the preceding 12-months, and does not hold any assets domestically or internationally, including ownership interest in a corporation, LLC, or other entity.

Please note that while some entities in a company structure may qualify for one or more exemptions, other entities in the structure may still have reporting obligations under the CTA. For instance, there is no exemption for parent companies or holding companies, even if they own only exempt entities. However, if a company’s ownership interests are wholly owned or entirely controlled, directly or indirectly, by certain exempt entities, then such subsidiary will be exempt from CTA reporting obligations.

Next Steps

Any “reporting company” should establish procedures to identify and verify the beneficial owners, maintain accurate records, and submit timely reports as required under the CTA. Considering FinCEN’s broad interpretation of “substantial control” and “ownership interests,” and in light of the apparent legislative intent to require disclosure, reporting companies with more complex ownership structure may want to consider consulting with a legal or other professional well-versed in the CTA to assist in determining which individuals must be reported as beneficial owners. 

For more information, FinCEN issued a helpful Small Entity Compliance Guide in December 2023, which you may access by clicking here, and continues to provide helpful guidance through its Frequently Asked Questions, which you may access by clicking here. FinCEN has also created a webpage for Beneficial Ownership Information (here) and reports may access the BOI E-Filing system (here) if you would like to file your report yourself. You may also contact your Burr & Forman attorney with any questions, for assistance with filing, or for more information about the issues discussed in this Alert.

Click here to read Part I and here to read Part III.