Corporate Transparency Act—Considerations Affecting Entities That Are Exempt or Excluded from Reporting Company Status

This article was originally posted on November 30, 2023 and has been updated to reflect changes that went into effect in 2024.

The Corporate Transparency Act (CTA) took effect on January 1, 2024. The Act is administered by FinCEN, a bureau of the U.S. Treasury Department charged with combatting money laundering and other financial crimes. The central feature of the Act is a requirement that “Reporting Companies” (as defined) must register with FinCEN by filing Beneficial Ownership Information (BOI) reports that disclose (among other things) the identities of those individuals who are their “Beneficial Owners” (as defined). This new reporting regime is the subject of a final CTA Rule, published September 30, 2022.[1]

Any corporation, LLC, or other legal entity formed under State (or tribal) law through a filing with a Secretary of State or similar official is deemed a Reporting Company unless the entity falls within any of 23 categories of entities that the CTA exempts from the definition of Reporting Company. That definition, by design, does not extend to any U.S. entity which is formed by operation of law without the necessity of a State (or tribal) formation filing. The statute thus assigns all entities into three different classes under the CTA: Reporting Companies, exempt entities, and excluded entities.[2] (For a discussion of what types of entities are treated as exempt entities or excluded entities, including a discussion of selected issues that could disqualify certain entities from being treated as exempt or excluded, please see “Determining Whether Your Entity is a Reporting Company: Selected Issues.”)

In its CTA Rule release, FinCEN estimated that 32.6 million entities will meet the definition of a Reporting Company in 2024 and thus need to file BOI reports during that year. It estimated that another 4.0 million entities presently qualify as exempt from Reporting Company status. FinCEN has not published any estimate of the number of excluded entities.

This article focuses on those entities that are either exempt or excluded from coverage as a Reporting Company. As discussed below, entities that themselves do not need to file BOI reports may still have important compliance interests at stake under the CTA.

BOI Reports

All BOI reports are to be submitted through a mandatory online platform, in questionnaire format.[3] FinCEN will use the submitted information to construct and maintain a massive data base to which law enforcement and financial institutions will have access but which otherwise is required to be protected against public disclosure.

BOI reports must identify the various individuals associated with the Reporting Company who are deemed to be its Beneficial Owners. That term is defined to cover senior officers and other control persons, together with individuals who (directly or indirectly) own or control significant equity or voting interests in the entity. For each covered individual, the BOI report must contain (or reference[4]) the following personal information: full legal name, date of birth, residence address, and a government ID number from a nonexpired driver’s license, passport, or other CTA-approved ID document, together with a legible image of that ID document. In the case of Reporting Companies newly formed on or after January 1, 2024 (but not older entities), the BOI report must also disclose similar personal information for up to two “Company Applicants” – defined to cover the individual who directly filed the formation paperwork for the entity, plus one other individual (if any) responsible for supervising the direct filer.

Duties of Exempt or Excluded Entities

An entity that is exempt or excluded from treatment as a Reporting Company is not itself required to file a BOI report. But that entity (and, more particularly, its associated individuals) might still have obligations under the CTA if the entity has (directly or indirectly) an ownership interest in or control relationship with another entity that is a Reporting Company.

For example, a trust established for estate planning purposes will generally be an excluded entity and not required to file a BOI report. But if the trust holds securities in a Reporting Company in which the trust is a major owner or in which it has or shares managerial control, then the Reporting Company will need to determine which of the trust’s associated individuals (if any) should be reported as Beneficial Owners of the Reporting Company.

Similarly, a venture capital fund that is an exempt entity is not required to file a BOI report. But for each Reporting Company in which the fund is a major owner or otherwise has substantial influence over important decisions of the portfolio company, the Reporting Company will need to determine which of the fund’s associated individuals (if any) should be reported as Beneficial Owners of the Reporting Company.

In many cases, an excluded trust or an exempt fund may have the right to appoint one or more members of the board of directors (or equivalent oversight body) or the right to veto selections of key officers. In those cases, there likely is at least one individual associated with the trust or fund that should be identified as a Beneficial Owner of the Reporting Company.

In addition to reputational considerations and internal policies calling for legal compliance generally, an investor has important incentives to cooperate with the Reporting Company’s efforts to file a timely and accurate BOI report. First, any portfolio Reporting Company that fails to meet its BOI reporting obligations is exposed to potential civil and criminal penalties and added legal expense, thereby unnecessarily reducing the value of the investment. More directly, if the investor is found to have caused the Reporting Company to violate the CTA – whether through withholding information or providing false information – the investor and its key associated individuals could themselves be subject to civil and criminal penalties and added legal expense.

At Least One Beneficial Owner, but Which One(s)?

It is one thing to conclude that the investor entity has enough ownership or control that at least one of its associated persons should be identified as a Beneficial Owner of the portfolio company. Nailing down whether more than one such individual should be identified, however, can be difficult. In making that determination, the investor entity should keep in mind that Beneficial Owner status is triggered by either (i) “substantial control” or (ii) 25⁺% ownership or voting control.

Substantial Control. Where the investor entity has board representation rights, its designated director will almost always be deemed a Beneficial Owner of the portfolio company. In many cases, that designee might fairly be considered the sole individual with control over decisions relating to the particular Reporting Company. Whether this is the case, however, comes down to a question of clout within the investor entity. Particularly where the board designee is a junior member of the investor’s management team, there may be another “behind the scenes” person she needs to consult with in order to authorize major decisions about that portfolio company. If so, this other individual generally should be considered a Beneficial Owner in addition to the board designee. In an investor organization run by a dominant or domineering founder or manager, that individual too should considered for inclusion as a Beneficial Owner of the portfolio company.

25% Ownership or Voting Control. If the investor entity holds at least a 25% ownership or voting position[5] in the portfolio company, a question arises as to whether any one individual or set of individuals has control over the investor entity. Authority to sell that ownership stake, acquire a larger stake, or waive first refusal rights might rest with someone other than the investor’s representative on the portfolio company board. That ultimate control person (or set of control persons) will generally be subject to identification as Beneficial Owner(s) in the portfolio company’s BOI report.

Any exempt or excluded entity that owns interests in one or more Reporting Companies should be prepared to identify its appropriate control persons, and to do so in a manner that inspires confidence in the accuracy of that determination. The regulatory standards defining Beneficial Owners are very context-specific. If the investor entity is well-versed in those standards, it should be in the best position to analyze its particular context and identify which of its associated individuals should fairly be considered indirect Beneficial Owners of the portfolio company.