Part II of this three part CTA series discusses what entities qualify as a “reporting company” under the CTA to help you determine whether your company is subject to mandatory reporting.  We also examine who qualifies as a “beneficial owner” or “company applicant” under the Act as well as discussing the subsidiary exemption.

Is your Company a “reporting company” subject to mandatory reporting?

Under the Corporate Transparency Act (“CTA”), a “reporting company” includes a corporation, limited liability company, or other similar entity (1) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe, or (2) formed under the laws of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.  However, a “reporting company” does not include a company that falls under one of the following 23 exemptions:

* If your company is formed under the laws of a foreign country and meets the criteria of Exemption 18, your company is subject to a separate reporting requirement.

These 23 exemptions fall under one of four major groups and are further defined as follows: (1) “large operating companies” defined as companies that have more than 20 full-time employees in the U.S., maintain an operating presence at a physical office in the U.S., and have reported more than $5 million in gross sales in the U.S. on the previous year’s federal tax filing; (2) “inactive entities” defined as companies that existed on or before January 1, 2020, have no direct or indirect foreign interests, have not had a change in ownership in the last 12 months, do not engaged in active business, do not hold any assets, and have not sent or received funds through an associated financial account in excess of $1,000 in the previous 12 months; (3) business entities that are already subject to substantial federal government regulation; and (4) entities that are subsidiaries of certain exempt entities.

Who is a Beneficial Owner or Company Applicant?

Once a company determines whether its business is a “reporting company” under the CTA, the next step is to determine who qualifies as a “beneficial owner” or “company applicant.”  A beneficial owner is defined as  (1) an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise exercises substantial control over the entity;  or (2) owns or controls not less than 25 percent of the ownership interests of the entity. 

“Substantial control” is defined as having a major influence on the reporting company’s decisions or operations.  An individual exercises substantial control over a reporting company if the individual meets any of the following criteria: (1) the individual is a senior officer, (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company, (3) the individual is an important decision-maker, or (4) the individual has any other form of substantial control over the reporting company.  “Important decisions” include defining the nature and scope of the business, buying or selling assets or investing funds, or determining how the business is structured or managed.  “Ownership interest” includes all ownership options, such as capital or profit interest, equities, stocks, futures, options, and any other mechanism through which an individual’s ownership is established.

A “company applicant” is (1) an individual who directly files the document that creates the entity or the document that first registers the entity to do business in the United States, or (2) an individual that is primarily responsible for directing or controlling the filing of the relevant document by another.  Not all reporting companies are required to report their company applicants to the United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”).  Specifically, a reporting company is only required to report its company applicants (a maximum of two) if it is a domestic reporting company created on or after January 1, 2024, or a foreign reporting company first registered to do business in the United States on or after January 1, 2024.  Moreover, all company applicants must be individuals, not companies or legal entities.  If an attorney or accountant files the document that creates the entity, then the attorney or accountant meets the definition of “applicant.”  By way of example, if an attorney or accountant completes the paperwork to form an entity using information provided by the client and then subsequently sends the paperwork to a corporate service provider who files it with a secretary of state, the company applicants are (1) the attorney/accountant because he/she was primarily responsible for directing or controlling the filing, and (2) the individual at the corporate service provider who directly filed the document.

In Part III of this CTA Series we will discuss additional individual exemptions for beneficial owners.

What is the Subsidiary Exemption?

If a separate business entity owns or controls at least 25% of the reporting company, the reporting company must report the individuals who influence the reporting company’s business operations unless the reporting company is (1) 100% fully owned or controlled by another entity or entities, and (2) all such entities are exempt from the definition of “reporting company.”  In such case, the reporting company may report the name or names of all of the exempt entities instead of information about the individual who is a beneficial owner of a reporting company through ownership interests in those exempt entities.  On the other hand, joint ventures and joint venture subsidiaries that are owned, directly or indirectly, by one or more non-exempt entities must submit BOI Reports if any non-exempt parent has decision rights, such as approval over major decisions.  Partial control is insufficient for a subsidiary to qualify for the exemption. 

The lawyers at Jordon Voytek will continue to monitor the development of this new area of law and are available to help your company navigate the complexities of the CTA and any future state laws addressing corporate transparency so that your entities can be in compliance with CTA and other applicable laws and regulations.  Jacquelyn Jordon Core and Michael T. Voytek are Founding Partners at Jordon Voytek. Jacquelyn and Michael focus their practice on mergers and acquisitions, and corporate structuring and restructuring, as well as general corporate advice and assistance.  Sandy Wilson is Of Counsel to Jordon Voytek.  She focuses her practice on labor and employment law and counseling.  They are available to assist businesses of all sizes with general counsel services, meeting their day-to-day legal needs. To contact them please contact Jacquelyn directly at Jacquelyn@JordonVoytek.com, or by phone at 304.777.0790, or contact Michael directly at Michael@JordonVoytek.com, or by phone at 203.360.6232, or contact Sandy directly at Sandy@JordonVoytek.com, or by phone at 304.276.1292.