Reporting Company

Exemptions to the Beneficial Ownership Information Reporting Requirements

January 11, 2024 by Kim & Rosado LLP

Understanding Beneficial Ownership Information Reports

Exemptions to the Beneficial Ownership Information Reporting Requirements

If an entity is a reporting company, it may be required to file a beneficial ownership information report. But a reporting company will not have to file a beneficial ownership information report if it falls within one of the 23 exemptions. The Corporate Transparency Act excludes from the beneficial ownership information filing requirement 23 types of entities. To determine if your entity is required to file a beneficial ownership information report, you must first determine if it is a reporting company and then determine if it is excepted from filing.

The Rationale Behind the Exemptions

The Corporate Transparency Act seeks to identify the beneficial owners of entities that are formed or registered in the United States. Realizing the heavy burdens that beneficial ownership information reporting creates for businesses, Congress tried to tailor the law narrowly. Carving out 23 exemptions to the beneficial ownership information filing requirement focuses FinCEN’s beneficial ownership database on entities where the risk of unlawful activities is highest. The exemptions to beneficial ownership information reporting generally apply to entities that are already regulated by federal or state agencies, or that are at lower risk of being used for unlawful activities due to their nature or structure.

For example, entities such as banks, credit unions, and insurance companies are already heavily regulated. Including these entities in the beneficial ownership information reporting requirements would not provide law enforcement with any information not already in its possession. Additionally, certain types of entities, like inactive entities or subsidiaries of exempt entities, are less likely to be used for unlawful purposes due to their lack of activity or ownership structure. Exempting these entities reduces the reporting burden on businesses that pose a lower risk, allowing FinCEN’s database to identify entities that present a higher risk for financial crime.

The exemptions are part of the Corporate Transparency Act’s intent to create greater transparency while minimizing unnecessary regulatory burdens on businesses, particularly those that are less likely to be involved in unlawful activities.

Specific Exemptions

Exemption Number	Exemption Short Title
1	Securities reporting issuer
2	Governmental authority
3	Bank
4	Credit union
5	Depository institution holding company
6	Money services business
7	Broker or dealer in securities
8	Securities exchange or clearing agency
9	Other Exchange Act registered entity
10	Investment company or investment adviser
11	Venture capital fund adviser
12	Insurance company
13	State-licensed insurance producer
14	Commodity Exchange Act registered entity
15	Accounting firm
16	Public utility
17	Financial market utility
18	Pooled investment vehicle
19	Tax-exempt entity
20	Entity assisting a tax-exempt entity
21	Large operating company
22	Subsidiary of certain exempt entities
23	Inactive entity

Securities reporting issuer: An entity that is either an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 or is required to file reports under section 15(d) of that Act. Such entities are generally subject to the reporting requirements set forth by the Securities and Exchange Commission, which includes the obligation to file various forms and reports such as annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports (Form 8-K) to provide the public with an ongoing picture of their financial status and material business matters.
Governmental authority: An entity that is established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States, and that exercises governmental authority on behalf of the United States or any such Indian Tribe, State, or political subdivision.
Bank: For the purposes of the exemption to filing Beneficial Ownership Information Reports, a “bank” is defined in several ways under different statutes. An entity that meets any of these definitions may qualify for the exemption:
1. The entity is a “bank” as defined in section 3 of the Federal Deposit Insurance Act.
2. The entity is a “bank” as defined in section 2(a) of the Investment Company Act of 1940.
3. The entity is a “bank” as defined in section 202(a) of the Investment Advisers Act of 1940.
Credit union: An entity meeting the definition of either a “federal credit union” or a “state credit union” as defined in section 101 of the Federal Credit Union Act.
Depository institution holding company: Any entity that meets one of the following two criteria:
2. The entity is a “bank holding company” as defined in section 2 of the Bank Holding Company Act of 1956.
3. The entity is a “savings and loan holding company” as defined in section 10(a) of the Home Owners’ Loan Act.

Money services business: An entity that is registered with the Financial Crimes Enforcement Network under 31 CFR 1022.380. This type of business typically includes currency dealers or exchangers, check cashers, issuers of traveler’s checks or money orders, sellers or redeemers of traveler’s checks or money orders, and money transmitters.
Broker or dealer in securities: An entity that meets both of these criteria will be excepted from the beneficial ownership information report filing requirement:
1. The entity is a “broker” or “dealer,” as those terms are defined in section 3 of the Securities Exchange Act of 1934, and
2. The entity is registered under section 15 of the Securities Exchange Act of 1934.

Securities exchange or clearing agency: An entity that qualifies if both of the following criteria apply:
1. The entity is an “exchange” or “clearing agency,” as those terms are defined in section 3 of the Securities Exchange Act of 1934, and
2. The entity is registered under section 6 or 17A of the Securities Exchange Act of 1934.

Other Exchange Act registered entity: An entity qualifies for this exemption if both of the following criteria apply:
1. The entity is not a securities reporting issuer (Exemption 1), a broker or dealer in securities (Exemption 7), or securities exchange or clearing agency (Exemption 8), and
2. The entity is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Investment company or investment adviser: To qualify for this exemption, an entity must be both:
1. Either an investment company as defined in section 3 of the Investment Company Act of 1940 or an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940, and
2. registered with the Securities and Exchange Commission under either of these authorities:
  1. The Investment Company Act of 1940, or
  2. The Investment Advisers Act of 1940.

Venture capital fund adviser: An entity qualifies for this exemption if both of the following criteria apply:
1. The entity is an investment adviser that is described in section 203(l) of the Investment Advisers Act of 1940, and
2. The entity has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the Securities and Exchange Commission.

Insurance company: An entity that is an insurance company as defined in section 2 of the Investment Company Act of 1940.

State-licensed insurance producer: To qualify for this exemption, an entity must meet both of the following requirements:
1. The entity is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State, and
2. The entity has an operating presence at a physical office within the United States. The term “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.

Commodity Exchange Act registered entity: An entity that meets both of the following requirements:
1. The entity is a “registered entity” as defined in section 1a of the Commodity Exchange Act, and
2. The entity is registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and is one of the following:
  1. A “futures commission merchant,” “introducing broker,” “swap dealer,” “major swap participant,” “commodity pool operator,” or “commodity trading advisor,” each as defined in section 1a of the Commodity Exchange Act, or
  2. A “retail foreign exchange dealer” as described in section 2(c)(2)(B) of the Commodity Exchange Act.

Accounting firm: The entity is a public accounting firm registered under section 102 of the Sarbanes-Oxley Act of 2002.
Public utility: For this exemption, an entity qualifies if both of the following apply:
1. The entity is a “regulated public utility” as defined in 26 U.S.C. 7701(a)(33)(A), and
2. The entity provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.
Financial market utility: The Financial Stability Oversight Council has designated the entity as a financial market utility under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
Pooled investment vehicle: An entity meeting the requirements of both sections (a) or (b) qualifies for this exemption to the beneficial ownership information report filing requirement.
1. Any investment company, as defined in section 3(a) of the Investment Company Act of 1940 or any company that would be an investment company under that section but for the exclusion provided from that definition by paragraph (1) or (7) of section 3(c) of that Act, and is identified by its legal name by the applicable investment adviser in its Form ADV (or successor form) filed with the Securities and Exchange Commission or will be so identified in the next annual updating amendment to Form ADV required to be filed by the applicable investment adviser pursuant to rule 204–1 under the Investment Advisers Act of 1940, and
2. Is operated or advised by any of these exempt entities:
  1. Bank (Exemption 3),
  2. Credit union (Exemption 4),
  3. Broker or dealer in securities (Exemption 7),
  4. Investment company or investment adviser (Exemption 10), or
  5. Venture capital fund adviser (Exemption 11).

Tax-exempt entity: An entity is considered a tax-exempt entity for purposes of this filing exemption if any of the following four criteria apply:
1. The entity is an organization that is described in section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of the Internal Revenue Code.
2. The entity is an organization that is described in section 501(c) of the Internal Revenue Code and was exempt from tax under section 501(a) of the Internal Revenue Code but lost its tax-exempt status less than 180 days ago.
3. The entity is a political organization, as defined in section 527(e)(1) of the Internal Revenue Code, that is exempt from tax under section 527(a) of the Internal Revenue Code.
4. The entity is a trust described in paragraph (1) or (2) of section 4947(a) of the Internal Revenue Code.

Entity assisting a tax-exempt entity: To fall within this exemption, an entity must meet all of the four following criteria:
1. The entity operates exclusively to provide financial assistance to, or hold governance rights over, any tax-exempt entity described in Exemption 19,
2. The entity is a United States person as defined in section 7701(a)(30) of the Internal Revenue Code,
3. The entity is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence, and
4. The entity derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence.

Large operating company: An entity that is exempted from filing a Beneficial Ownership Information report if it is a large operating company, which:
1. employs more than 20 full-time employees in the United States,
2. filed a U.S. federal income tax return in the previous year reporting more than $5,000,000 in U.S.-source gross receipts or sales, and
3. has an operating presence at a physical office within the United States.

Subsidiary of certain exempt entities: An entity qualifies for the subsidiary exemption if its ownership interests are controlled or wholly owned, directly or indirectly, by one or more of the following types of exempt entities: securities reporting issuer (Exemption 1), governmental authority (Exemption 2), bank (Exemption 3), credit union (Exemption 4), depository institution holding company (Exemption 5), broker or dealer in securities (Exemption 7), securities exchange or clearing agency (Exemption 8), Other Exchange Act registered entity (Exemption 9), investment company or investment adviser (Exemption 10), venture capital fund adviser (Exemption 11), insurance company (Exemption 12), state-licensed insurance producer (Exemption 13), Commodity Exchange Act registered entity (Exemption 14), accounting firm (Exemption 15), public utility (Exemption 16), financial market utility (Exemption 17), tax-exempt entity (Exemption 19), or large operating company (Exemption 21).
Inactive entity: An “inactive entity” for purposes of the exemption from filing a beneficial ownership information report is defined by meeting all six of the following criteria:
1. The entity was in existence on or before January 1, 2020.
2. The entity is not engaged in active business.
3. The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially. A “foreign person” is defined as someone who is not a United States person, with a United States person being a citizen or resident of the United States, domestic partnership and corporation, and other estates and trusts as defined in section 7701(a)(30) of the Internal Revenue Code of 1986.
4. The entity has not experienced any change in ownership in the preceding twelve-month period.
5. The entity has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve-month period.
6. The entity does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

All entities should closely review the exemptions with their legal counsel to determine whether they have an obligation to file beneficial ownership information reports. If an entity is a reporting company and does not fall within any of these exemptions, it will be required to file a beneficial ownership information report.

Conclusion

Determining whether your entity can anchor in the safe harbor of an exemption requires a keen understanding of the Corporate Transparency Act. We encourage you to reach out to us with any questions regarding your beneficial ownership information reporting requirements. Our expertise is your asset in charting a compliant course for your business.

What Entities Must File Beneficial Ownership Information Reports?

January 10, 2024 by Kim & Rosado LLP

Understanding Beneficial Ownership Information Reports

What Entities Must File Beneficial Ownership Information Reports?

The Corporate Transparency Act requires “reporting companies” to file beneficial ownership information reports. Reporting companies can be “domestic reporting companies” or “foreign reporting companies.”

Domestic Reporting Companies: A domestic reporting company is an entity that is created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. Essentially, any entity established under U.S. state law would typically qualify as a domestic reporting company. In addition to corporations or limited liability companies, reporting companies will generally include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships because such entities are generally created by a filing with a secretary of state or similar office. Legal entities, including certain trusts, are not domestic reporting companies if they are not created by the filing of a document with a secretary of state or similar office.

Foreign Reporting Companies: A foreign reporting company is a (1) a corporation, limited liability company, or any other entity that is (2) created under the laws of a foreign country and (3) registered to do business in the United States. The key distinction is that these entities are not originally formed in the United States. Instead, they are originally formed in a foreign jurisdiction. But these foreign entities are subject to beneficial ownership information reporting requirements because their business operations extend into U.S. jurisdictions through formal registration. For entities formed overseas, they will be considered a foreign reporting company if they are registered to do business in the United States by the filing of a document with a secretary of state or a similar office.

Have an Interest in a Domestic Reporting Company or a Foreign Reporting Company?

If an entity is either a domestic reporting company or foreign reporting company, it may have to file a beneficial ownership information report. Again, the relevant consideration is whether an entity is created or registered to do business in the United States through the filing of a document with a secretary of state or similar office. The law is drafted and interpreted broadly to capture all entities registered with a state.

Secretary of State or Similar Office

For purposes of the beneficial ownership information reporting requirements, the term “secretary of state or similar office” generally refers to the state-level governmental authority that is responsible for the registration and administration of business entities within that state. Each state and territory in the United States has an office, often but not always called the secretary of state, that handles entity registrations, whether they be corporations, limited liability companies, limited partnerships, or other legal business entities.

Examples of offices that are similar to a secretary of state include:

Division of Corporations: In some states, the office responsible for entity registration may be called the Division of Corporations.
Department of Commerce: In certain states, the Department of Commerce may oversee entity registrations and filings.
Corporations Commission: Some states have a dedicated Corporations Commission that handles the formation and registration of entities.
Business Services Division: In other states, the office might be known as the Business Services Division.
Office of the Registrar: In some jurisdictions, the office might be referred to as the Office of the Registrar, which is responsible for the registration of entities.

While these offices serve a similar function to the secretary of state in terms of entity registration, the specific name and organizational structure can differ from state to state. Although the name may be different, registration of an entity with these offices, which are similar to a secretary of state, may create a requirement to file a beneficial ownership information report.

The Importance of State Law in Identifying Domestic Reporting Companies

What constitutes a domestic reporting company is nuanced and varies according to state law. For instance, in states that have adopted the Uniform Limited Partnership Act, limited partnerships are formed upon filing of a document with the secretary of state, and will meet the criteria of a domestic reporting company.

On the other hand, general partnerships usually do not require such a filing and, in most states, are not considered domestic reporting companies under the Corporate Transparency Act. Delaware is an exception, where a general partnership must file specific documents to be legally formed, bringing it under the umbrella of domestic reporting companies.

Trusts present another complexity; while most can be established without any state filing, a Delaware statutory trust must file a certificate with the secretary of state, categorizing it as a domestic reporting company. State and, where relevant, Tribal laws must be diligently reviewed to accurately identify entities that fall within the definition of a domestic reporting company. The nuances of state law can significantly impact the classification of various entities, including limited liability partnerships (LLPs), business trusts, and certain types of partnerships.

FinCEN’s efforts to clarify the scope of the definition have made it clear that while corporations and LLCs are categorically included, other legal forms require a case-by-case analysis based on state law. In its estimation, FinCEN has projected that there are over 30 million domestic reporting companies in the United States, with an annual increase of approximately 3.7 million. This highlights the vast scale of the reporting obligations.

The Importance of State Law in Identifying Foreign Reporting Companies

If a foreign entity is is a foreign reporting company if it registers to do business in the U.S. through the filing of a document with a secretary of state or similar office. The breadth of this definition means that many foreign entities could be classified as foreign reporting companies. U.S. jurisdictions generally require any legal entity formed outside their borders to register if it engages in certain types of business activities within their territory.

In determining if your entity is a foreign reporting company, it is vital to be aware of the varying state laws that dictate when registration is necessary. For example, while a foreign corporation must register in Alaska to engage in legal proceedings, Arizona does not impose such a requirement for litigation purposes. However, most states do mandate registration for foreign corporations to handle payroll processes such as employee income tax withholding, making hiring an employee a common trigger for registration. The implications of this registration are significant: once a foreign entity registers in a state, it becomes subject to the reporting requirements of the Corporate Transparency Act.

Conclusion

The Corporate Transparency Act’s requirements represent a significant shift in the corporate compliance arena, and staying ahead of these changes is critical. At Kim & Rosado LLP, we are committed to guiding you through the beneficial ownership information reporting process and ensuring that your business is aligned with the new standards of corporate transparency.

Whether you are a new or established entity, we are here to provide the expertise and support you need. Reach out to us to ensure that your entity is in full compliance with the Corporate Transparency Act and to leverage our insights for your strategic advantage.