This article, written by attorney M. Seamus Cuddy, was originally published by the NH Bar News and can be found here. (p29)
Nearly one year ago, the first phase of Corporate Transparency Act (CTA) compliance began. Accordingly, all new, non-exempt reporting companies have been required to comply with the CTA’s disclosure requirements this year. Now, with two weeks remaining in 2024, the CTA’s final compliance deadline—“CTA Y2K”—is well within striking distance. While corporate departments across the country are undoubtedly familiar with the CTA by now, it is worth taking stock of what we have learned about the CTA this year.
By way of review, the CTA was enacted with bipartisan congressional support in 2021 in an attempt to curb the use of anonymous shell companies for illicit activities, like money laundering and tax evasion, by mandating that most companies disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The goal was to ensure that law enforcement and financial institutions have access to accurate ownership information to detect and prevent financial crime. FinCEN estimated that more than 32 million companies would be filing Beneficial Ownership Information (BOI) reports with the bureau in 2024; though, as of early November, FinCEN had received fewer than 7 million reports.
The CTA includes several exemptions to its reporting requirements, primarily targeting larger or more heavily regulated entities. Two of the most significant of those exemptions are the large operating company exemption and the subsidiary exemption. As to the former, the CTA exempts companies with more than 20 full-time U.S. employees, over $5 million in annual revenue, and an operating presence in the U.S. One confusing aspect of these criteria relates to subsidiaries and aggregation. FinCEN maintains that while a company may, for purposes of the exemption, aggregate revenue with its subsidiaries, it may not aggregate employees. Thus, a parent company with 20 employees will not qualify for the large operating company exemption, even if it has a subsidiary with multiple employees and would otherwise qualify for the exemption—and even if its subsidiary does qualify for the exemption. However, a company whose revenue falls below $5 million excluding its subsidiary’s revenue but exceeds $5 million including that revenue satisfies the revenue criterion so long as the companies file a consolidated tax return.
The second significant exemption—the subsidiary exemption—exempts those entities “whose ownership interests are controlled or wholly owned, directly or indirectly, by [certain exempt entities].” The language of this exemption is confusing; it strangely qualifies the word “owned” but not “controlled.” What if the entity is partially controlled by an exempt entity? Early this year, FinCEN clarified that the ownership interests of a subsidiary must be fully controlled or wholly owned by an exempt entity to qualify for the exemption.
Once you get past applicability, you must answer the more central question: Who is a beneficial owner? According to the CTA, it is a natural person who either exercises substantial control over a company or owns or controls at least 25% of the company’s ownership interests. In most cases, that should be clear. But not always. Even where there are several clear beneficial owners, there might also be a sizeable bucket of people straddling the line between beneficial owner and average Joe. All of them could be beneficial owners. Or maybe none of them are. As FinCEN recently reminded us, while there will always be at least one beneficial owner, there is no maximum number of beneficial owners a company can have. And an individual can be a beneficial owner by virtue of their ownership, their control, or both.
While it is easy to get bogged down in the CTA’s intricacies, it is important to keep in mind that for the majority of subject businesses, the hard part of compliance will not be assessing applicability or identifying beneficial owners; it will be establishing the internal infrastructure required to maintain a report that is accurate and up to date. This means remembering to update your BOI report when an officer or major shareholder moves, or even when they renew the passport or driver’s license that is on file with FinCEN. It also means being thoughtful about how an organizational change might affect your company’s BOI report. For instance, a conversion from one entity type to another will trigger different BOI reporting requirements depending on the circumstances.
As we approach CTA Y2K, it is tempting to tell ourselves that the CTA is running on borrowed time. After all, there is good reason to think that. From pending court cases to the incoming regulation-averse Trump Administration, the CTA’s chances of survival (at least in its current form) are seemingly bleak. Moreover, in early November, members of Congress penned a letter to the treasury secretary and FinCEN director voicing their concerns about FinCEN’s CTA implementation and requesting a delay in enforcement. This is likely to trigger additional guidance from FinCEN, if not a substantial change of course. But until we hear more, the CTA—and its potentially severe penalties for noncompliance—cannot be ignored. Therefore, any non-compliant clients must hunker down and file their BOI reports before the clock strikes midnight on 2024.