The Corporate Transparency Act (CTA) was enacted to combat money laundering and tax fraud. It requires companies created or registered by a filing with a state, Indian Tribe, or similar agency to disclose to the Financial Crimes Enforcement Network (FinCEN), information about the company and its beneficial owners in a BOI Report. Failure to timely report your company’s or its beneficial owners’ information could result in significant fines, penalties and, in some instances, imprisonment.

There are 23 categories of entity exemptions under the CTA, largely covering entities already subject to robust federal reporting requirements. Two of the exempt categories pertain to large operating companies and subsidiaries of certain exempt entities whose ownership interests are controlled or wholly-owned by an exempt entity. Because the test for these exemptions are complex, we describe them further below and provide examples to clarify.

Large Operating Companies

The large operating company exemption applies to an entity that: (i) employs more than 20 employees on a full-time basis, as calculated under federal law; (ii) filed its prior year federal income tax return demonstrating more than $5,000,000 in gross receipts or sales in the United States; and (iii) has an operating presence at a physical office within the United States. In general, “full-time employee” means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week or 130 hours per month with an employer. “Operating presence at a physical office within the United States” means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.

If the company is part of an affiliated group of companies that has a physical presence in the United States and that files a consolidated return, the gross receipts or sales among the affiliated companies as shown on the consolidated return can be used to meet the threshold test by all of those companies. However, employees are not allowed to be aggregated across the affiliated entities to meet the employee headcount test. Only those companies in the affiliated group that each have at least 21 employees would be exempt even though all the affiliated entities meet the other two tests.

Example

Company A is part of an affiliated group of companies that files a consolidated return with over $5,000,000 in gross receipts and has a physical operating presence in the United States. Company A has 21 employees, and its parent company has 19 employees. As a group, the physical presence test and the gross receipts/sales tests would be satisfied but only Company A would be exempt from reporting information about its business and beneficial owners under the large operating company exemption. The parent company would still need to file a BOI Report as it did not separately meet the employee headcount test.

Subsidiaries Controlled or Wholly-Owned By An Exempt Entity

FinCEN recently clarified that the CTA exempts any entity from reporting if it is "100 percent" owned or controlled by one of the 18 categories of exempt entities below:

• Securities reporting issuer
• Governmental authority
• Bank
• Credit union
• Depository institution holding company
• Broker or dealer in securities
• Securities exchange or clearing agency
• Other Exchange Act registered entity
• Investment company or investment adviser
• Venture capital fund adviser
• Insurance company
• State-licensed insurance producer
• Commodity Exchange Act registered entity
• Accounting Firm
• Public utility
• Financial market utility
• Large operating company
• Tax Exempt Entity: 501(c) nonprofits, 527 political organizations, or a trust described in paragraph (1) or (2) of section 4947(a) of the Internal Revenue Code

Four of the 23 categories of otherwise exempt entities do not qualify to provide this subsidiary exemption to its wholly-owned subsidiary: (i) entities that are exempt due to inactivity, (ii) entities assisting a tax-exempt entity, (iii) pooled investment vehicles, or (iv) a money service or transmitter business.

Example 1

Company A is a wholly-owned subsidiary of Company B, a tax exempt entity, as described above. Company A is exempt from CTA reporting because it is a wholly-owned subsidiary of the exempt entity.

Example 2

Company A is a subsidiary that is 51% owned by an entity that qualifies for the large operating company exemption and 49% owned by a small operating company. Because Company A is not wholly-owned by an exempt entity, Company A must file a BOI Report with FinCEN.

Example 3

Company A is the parent of three wholly-owned subsidiaries. The consolidated group operates exclusively in the United States and its prior year gross sales were $10,000,000 as shown on their federal consolidated tax return. Company A has 21 employees, and each of the three subsidiaries has 18 employees. Company A is exempt under the large operating company exemption and the subsidiaries are exempt under the subsidiary exemption.

Penalties For Failure To Register

As a reminder, the willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fail to file a required BOI Report may be held accountable as well for that failure.

For more information about the CTA including who must report, what information must be reported, a full list of exemptions, deadlines, and penalties for failure to comply, please see our January 1, 2024 article.

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