CTA Compliance Check-In #2

In June, we circulated an article entitled “Mid-year assessment: Are you in good shape on CTA compliance?” The Corporate Transparency Act (CTA) deadline for filing BOI reports with FinCEN is now less than three months away – any “reporting company” formed before 2024 must file its BOI report on or before January 1, 2025.

The CTA and a related CTA Rule create a new, complex registration structure that will require reports from an estimated 32.6 million entities this year. We have published a series of articles discussing these requirements, which can be found on our CTA landing page. This article does not attempt to summarize these complex requirements, but instead serves as a reminder to start your preparations now, if you haven’t already done so. The description here of CTA requirements is somewhat simplified for the sake of readability.

Our June article recommended the following sequence of steps:

First, identify the number of entities in play.
Second, determine if any of those entities qualify for an exemption, keeping in mind that most companies do not qualify.
Third, for each non-exempt entity, determine what individuals need to be covered by that entity’s BOI report.
Fourth, determine whether the necessary personal information is readily available for each such covered individual.
Fifth, determine if you need help.

Here are some common hurdles that might need to be overcome, depending on your particular situation:

MULTIPLE REPORTS: If you have multiple entities within your affiliated group, then you will need to file a separate BOI report for each entity (not counting those that qualify as exempt). But the good news is that much of the information will be the same as other reports. Specifically, if the owners and control persons overlap from entity to entity, then the information about them in one report will often be the same as for other reports. However, if the ownership and management structure is not parallel from entity to entity, then the reporting process will be more complex for you.

COVERED INDIVIDUALS OUTSIDE YOUR ORGANIZATION. It generally will be easy to identify covered individuals (the CTA nomenclature is “beneficial owners”) among your senior officers and your directors. But if you have an outside investor entity that directly or indirectly owns at least 25% of one or more of one or more of your companies, you likely will need help from that outside entity to identify its covered individuals for your report. Here you are looking for two types of individuals: (i) any individual who has sufficient clout to influence the outside entity’s decisions about major matters for your reporting company and (ii) any other individual who is a passive owner in the outside entity but large enough to own, indirectly, a 25+% stake in your reporting company. We are happy to review your management and ownership picture with you and offer advice on identifying covered individuals.

PII RESISTANCE. Most covered individuals will provide you with the necessary PII (personally identifying information) if asked, but (a) it is now time to ask and (b) you need to react if they procrastinate or refuse. A reporting company has an obligation to collect and report this personal information, and senior officers have potential liability if that does not occur. If a covered individual does not provide a legible image of her passport or driver’s license when asked, you need to figure out how to deal with this. We may be able to offer advice on ways to respond, and could propose changes in governance documents that would give you additional leverage to obtain this information from reluctant individuals.

HOLDING COMPANY SITUATIONS. If at least one of your affiliated entities has lots of full-time U.S. employees (at a minimum, consistently exceeding 20), that company might well qualify for the so-called “large operating company” exemption. (There also is a revenue component. See our prior article for guidance on this exemption.) If the entity does qualify, then every wholly-owned subsidiary of that operating company will be exempt too (under the “subsidiary” exemption). Be aware, however, that there is no “parent” exemption or “sister company” exemption. In an affiliated group, if the ultimate parent company does not itself have more than 20 full-time U.S. employees, then it cannot meet the “large operating company” exemption. The rules on this are quite clear – the employee headcount is entity-by-entity, and is not figured on a consolidated basis. Additionally, if the operating company has sufficient employees but is structured as a wholly-owned LLC (and thus a “disregarded entity” for federal income tax purposes), then current commentary suggests that the entity won’t qualify for the “large operating company” exemption because it does not “file” federal income tax returns. (FinCEN guidance on this has been lacking – you may wish to confirm this position with us before you file for the LLC.)

WHETHER TO REQUIRE FINCEN IDs. Some companies are telling their senior officers and directors to get FinCEN IDs. If a covered individual has a FinCEN ID, the reporting company need only include that number and need not provide the otherwise necessary PII. This saves the company from having to collect and protect PII and (importantly) shifts to the covered individual all responsibility to report changes in her PII. In contrast, if the reporting company’s filing includes her PII, then the reporting company must very promptly file a new BOI report each time it learns of a change (or correction) in her previously reported PII. For large organizations, keeping track of whether any director has changed residence, for example, is a significant burden. There typically is no good way to force a senior officer or director to get a FinCEN ID, but very often adopting a company policy on this will be sufficient to gain cooperation.

SPECIAL ENTITIES. Just because an entity has no owners or is a “shell company” or otherwise small or inactive does not necessarily mean it escapes CTA reporting requirements.

• Single-member LLCs owned by individuals (such as those formed to hold an asset or to provide services) are generally not exempt even if disregarded for tax purposes.
• A trust established for estate planning or charitable purposes generally is an excluded entity, but if it owns significant interests in one or more other entities, its trustees or other control persons (and perhaps one or more underlying beneficiaries) will be covered individuals in CTA reports filed by those entities. Business trusts, on the other hand, might or might not be reporting companies (those formed under Delaware law, for example, must report; those formed under Massachusetts law do not).
• Homeowner association entities will be exempt if they claim tax-exempt status under Code Section 501(c), but otherwise generally will need to file BOI reports even though they issue no stock and have no owners.
• You might think a dissolved entity escapes the CTA filing obligation. Surprisingly, FinCEN takes the position that if an entity formed before 2024 did not complete its windup before 2024, then it must file a BOI report by January 1, 2025. Oddly, for an entity that files a BOI report, the entity’s termination is not itself reportable, but associated changes in its management, ownership, name, or address will trigger the need to file a new report.