Pursuant to the Corporate Transparency Act (“CTA”), effective January 1, 2024, many legal entities and individuals associated with these legal entities are required to report certain information to a bureau of the United States Department of the Treasury, the Financial Crimes Enforcement Network (“FinCEN”). Needless to say, based on both privacy concerns and a desire to avoid what is considered bureaucratic nuisance, persons would prefer to avoid such FinCEN reporting. This article discusses the available exemptions from FinCEN reporting, which can enable a legal entity or an individual associated with a legal entity to avoid FinCEN reporting.

The potential scope of FinCEN reporting is very broad. Entities subject to FinCEN reporting are known as “reporting companies”. There are two types of reporting companies – “domestic reporting companies” and “foreign reporting companies”.

Domestic reporting companies include corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States. Thus, in addition to corporations and limited liability companies, limited partnerships, statutory trusts, and business trusts generally will qualify as domestic reporting companies. On the other hand, most trusts established for estate planning or asset protection purposes will not qualify as domestic reporting companies.

Foreign reporting companies include entities formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

Even if an entity otherwise would qualify as a domestic reporting company or a foreign reporting company, it is not subject to FinCEN reporting if it can qualify for any of the 23 exemptions that are available to exempt an entity from FinCEN reporting. These 23 exemptions are the following:

• Securities reporting issuer (issuer of securities registered or required to file information under the Securities Exchange Act of 1934);
• Governmental authority;
• Bank;
• Credit union;
• Depository institution holding company (bank holding company or savings and loan holding company);
• Money services business;
• Broker or dealer in securities;
• Securities exchange or clearing agency;
• Other Exchange Act registered entity (other entity registered under the Securities Exchange Act of 1934);
• Investment company or investment adviser;
• Venture capital fund adviser;
• Insurance company;
• State-licensed insurance producer;
• Commodity Exchange Act registered entity;
• Accounting firm (public accounting firm registered in accordance with the Sarbanes-Oxley Act of 2002);
• Public utility;
• Financial market utility;
• Pooled investment vehicle;
• Tax-exempt entity (entity that is an organization described in Internal Revenue Code Section 501(c), a political organization defined in Internal Revenue Code Section 527(e)(1), or a trust described in Internal Revenue Code Section 4947(a)(1) or (2));
• Entity assisting a tax-exempt entity;
• Large operating company (entity that employs more than 20 full time employees in the United States, has an operating presence at a physical office within the United States, and filed in the previous year a return in the United States demonstrating more than $5,000,000 in gross receipts or sales);
• Subsidiary of certain exempt entities; and
• Inactive entity (entity that was in existence on or before January 1, 2020, is not engaged in active business, is not owned by a foreign person, has not experienced any change in ownership in the preceding 12-month period, has not sent or received any funds in an amount greater than $1,000 in the preceding 12-month period, and does not otherwise hold any kind or type of assets).

Many of these exemptions relate to entities that are already subject to government regulation and required to report information. The three exemptions that would appear to be most likely to be applicable to at least some “closely-held” entities are the “tax-exempt entity” exemption, the “large operating company” exemption, and the “inactive entity” exemption.

In addition to entity FinCEN reporting, certain individuals also may be subject to FinCEN reporting. Each individual who is a “beneficial owner” of a reporting company is also subject to FinCEN reporting. For these purposes, a “beneficial owner” generally is an individual who either directly or indirectly (1) exercises “substantial control” over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests; an individual exercises “substantial control” if the individual (a) is a senior officer, (b) has authority to appoint or remove certain officers or a majority of directors (or a similar body), (c) is an important decision-maker, or (d) has any other form of “substantial control”.

Even if an individual otherwise would qualify as a beneficial owner, the individual is not subject to FinCEN reporting as a beneficial owner if such individual can qualify for any of the five exemptions that are available to exempt an individual from FinCEN reporting as a beneficial owner. These five exemptions are the following:

• The individual is a minor child;
• The individual merely acts on behalf of an actual beneficial owner as the beneficial owner’s nominee, intermediary, custodian, or agent;
• The individual is an employee of the reporting company, the individual’s “substantial control” over, or economic benefits from, the reporting company are derived solely from the employment status of the individual as an employee, and the individual is not a “senior officer” (any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, or chief operating officer, or any other officer, regardless of official title, who performs a similar function) of the reporting company;
• The individual’s only interest in the reporting company is a future interest through a right of inheritance, such as through a will providing a future interest in a company; and
• The individual is a creditor of the reporting company.

It is important to remember that “exempt” status or “non-exempt” status from FinCEN reporting for an entity or an individual is not a permanent determination. For example, if the applicable facts change in the future and thereby an entity that was exempt is no longer exempt from FinCEN reporting, the entity must comply with FinCEN reporting within 30 days after such change in the applicable facts.

If you have any questions concerning exemptions from FinCEN reporting, please discuss this issue with your advisers.

Note – National Small Business United Case

If you are looking to avoid FinCEN reporting, you should take note of the recent court decision in the case of National Small Business United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. March 1, 2024). In the case, the United States District Court for the Northern District of Alabama held that FinCEN reporting under the Corporate Transparency Act was unconstitutional. How should entities and individuals considering FinCEN reporting respond to the National Small Business United decision? There are several points to keep in mind.

First, the court’s decision was limited to the plaintiffs in the case (the over 65,000 members of the National Small Business Association as of March 1, 2024); it did not issue a general nationwide order applicable to all reporting companies. Second, the U.S. Justice Department on March 11, 2024 filed an appeal of the decision. Third, in response to the decision, FinCEN stated, “While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction, as specified below, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations”.

Thus, unless if you were a plaintiff in the National Small Business United case (i.e., a member of the National Small Business Association as of March 1, 2024), it appears that FinCEN views you currently as still potentially subject to FinCEN reporting, as the National Small Business United decision legally should not apply to you. This point is especially important as to domestic reporting companies formed and foreign reporting companies registered on or after January 1, 2024, which will have only 90 calendar days after receiving notice of the reporting company’s formation or registration to file their FinCEN reports. These “formed/registered January 1, 2024 or after” reporting companies may have to more quickly decide how to respond to the National Small Business United decision (if there is not then a final adjudication of the case and the issues in the case) than “formed/registered before January 1, 2024” reporting companies (which will have until January 1, 2025 to file their FinCEN reports).

If you have any questions concerning the National Small Business United decision, please discuss this issue with your advisers.

If you wish to discuss any of the above, find Pen Pal Gary’s contact info here.

Disclaimer: please note that nothing in this article is intended to be, or should be relied on as, legal advice of any kind. Neither LHBR Consulting, LLC nor Gary Stern provides legal services of any kind.