Related resource: The 23 exemptions from the Corporate Transparency Act’s beneficial ownership information reporting requirement
TRANSCRIPT
Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Domingo Vazquez, Vice President and Head of Corporations at CT Corporation. Today's discussion is one in a series of podcasts focusing on the Corporate Transparency Act. CT Corporation has received hundreds of questions from customers on the Corporate Transparency Act’s implications. So during today's podcast, Domingo will focus on the 23 exemptions set forth in the Corporate Transparency Act. And Domingo, it's great to have you on the podcast. I know we're going to cover a lot of important ground today.
Domingo Vazquez: For sure. Greg, I'm excited to be here. Thanks for having me. As you will know, the Corporate Transparency Act is in full effect. And you're right, we're getting a ton of questions from businesses who are wondering, do they need to file a beneficial ownership information report? And it's interesting, because at a high level, it's pretty simple, right? There are basically two steps that need to be taken to make that determination. First, they just need to determine whether or not the entity in question is classified as a reporting company. So a reporting company is a corporation, an LLC, or similar entity created by filing documents with the Secretary of State. That's typically how it's done. Not just U.S. entities. It actually applies to foreign entities as well. So if an entity is formed under the law of a foreign country, but it's registered to do business by filing a document here in the States, that also constitutes a reporting company. So that's basically the first step.
The second step is a little bit more complicated. If it is, in fact, a reporting company, they have to really determine whether or not they qualify for one of 23 types of entity exemptions under the law. So the law makes it simple in many cases where the entities listed under the exemption are highly regulated. They're already providing beneficial ownership information to the government. For example, publicly traded companies or public utilities or financial institutions or insurance companies or public accounting firms, and the list goes on. But there are three exemptions that could theoretically apply to any company. So not surprisingly, we get kind of the most questions about those. And they are exemption number 21, which applies to large operating companies; exemption number 22, which is really pertaining to subsidiaries of entities that are already exempted; and exemption number three, which really applies to inactive entities. So that's really where we get the concentration of our questions.
Greg Corombos: All right, well, let's take the first of those that you just mentioned. And that's large operating companies. What do we need to know there?
Domingo Vazquez: So under the Corporate Transparency Act, a large operating company is defined as a company that really meets the following criteria, and really all of the following criteria. One, it has 20 full-time employees based in the U.S. It operates from a physical office location in the United States. And third, it [has] filed a federal income tax return or an information return in the prior year and has demonstrated at least 5 million in gross receipts or sales from U.S. sources. So, again, the company must meet all three requirements in order to qualify for this exemption.
Greg Corombos: What exactly does it mean if an entity is determined to be a large operating company?
Domingo Vazquez: It's funny. I always recommend our clients to seek advice and counsel either from their accounting firm or legal adviser or both when making final determinations. But hypothetically, if the client determines that one of its entities is exempt because it meets kind of all three criteria, it doesn't have to file a beneficial ownership report. Nor does it actually have to file for the exemption; the entity is actually good to go. It's probably also worth mentioning that subsidiaries of large operating companies who are exempt can be exempt as well. So I mentioned that there's a subsidiary exemption earlier in our discussion. So a subsidiary of a large operating company would be exempt as well if its ownership interests are controlled, or wholly owned, either directly or indirectly, by an exempt large operating company. So several entities could actually qualify for these exemptions.
Greg Corombos: There are still different circumstances a company might be encountering that could raise some questions in the minds of its leaders, though. So for example, what happens if there's a change in an entity's status as a large operating company?
Domingo Vazquez: You hit on something that's a little bit tricky, right? Because changes can occur over time. So, if an entity…let's just say there was an entity that qualified for the large operating company exemption, and it does not qualify for any other exemptions, it would be required to file an initial report within 30 calendar days of the date it ceased to qualify. So if it was qualified, but it stopped qualifying, it would actually need to file, and the converse is true as well. So if you have a company that was not exempt, it filed an initial report, but then qualified for the large operating company exemption, let's say at a later date, it would actually have the right to file an updated report indicating that it's now exempt. And to make things just a little bit spicier, any changes to — call it a parent entity’s exemption status — can also have a cascading effect on controlled or wholly owned subsidiaries as well because of the subsidiary exemption. So the exemptions may seem straightforward, but they can be challenging to manage over time because of changes that can occur, not just to the entity's exemption status alone, but also between parental and subsidiary relationships between the entities. Does that make sense? It can get a little complicated, particularly overtime.
Greg Corombos: It is clarifying information there. So I hope that helps out anyone who had that question in their minds, but you've already teased it a couple of times here now, Domingo, and that's the subsidiary exemption. So this is a good segue to that part of our conversation. Tell me how subsidiaries play into this.
Domingo Vazquez: Because many corporations, LLCs, and other entities are subsidiaries that are owned in whole or in part by parent entities, we get a lot of questions about which subsidiaries are required to file a report, which are not, and questions about who their beneficial owners are, in fact.
Greg Corombos: Is a subsidiary of an exempt parent exempt to?
Domingo Vazquez: So the Corporate Transparency Act includes an exemption for a subsidiary of certain exempt entities. So we've talked a little bit about that. A subsidiary can qualify for this exemption if its ownership interests are controlled or wholly owned, directly or indirectly, by certain types of entities, exempt entities specifically. So these include entities like securities reporting issuers or governmental authorities, banks, credit unions, depository institution holding companies, brokers, or dealers and securities, and the list goes on and on.
But the one thing I would mention is that there are exceptions as well. So there are subsidiaries that do not qualify for the subsidiary exemption. For example, if there are subsidiaries of entities that are exempt because they are money services businesses, or because they are pooled investment vehicles, or entities assisting tax-exempt entities or inactive entities, that alone would not constitute an exemption. So again, my thought is it's best to consult a legal or accounting adviser just to be sure.
Greg Corombos: Okay, what about this one? If a subsidiary has both exempt and non-exempt owners, is the subsidiary exempt?
Domingo Vazquez: Yeah, I think the easiest answer is…for a subsidiary to qualify for the exemption, it must be 100% wholly owned or controlled by an exempt entity to qualify.
Greg Corombos: And then what happens if the exempt or non-exempt status of a subsidiary changes?
Domingo Vazquez: As was the case with the large operating company exemption, changes in a subsidiary status could also warrant filing an updated information report. So if a subsidiary that had qualified for a subsidiary exemption ceases to qualify, it'll now be considered a reporting company will have to file its initial BOI report with FinCEN within 30 calendar days of it no longer qualifying for the exemption. As an example, just to bring this to life, if an owner sells her shares in a subsidiary to a non-exempt entity, that would be a perfect example. And the inverse is true, too. As I shared before, if a subsidiary had filed a BOI report but now qualifies for the subsidiary exemption specifically, it could file an updated report with FinCEN within 30 days of being exempt indicating that it's now in fact exempt. So, you know, an example here would be, if an entity sells 100% of its ownership interest to an exempt entity, that would be a perfect example. So again, keeping track of changes to statuses over time is very, very important.
Greg Corombos: And FinCEN is the Financial Crimes Enforcement Network inside the Treasury Department, which is who you're filing these beneficial ownership information reports with. Who are the beneficial owners for a subsidiary owned by entities.
Domingo Vazquez: A beneficial owner is defined as an individual who either directly or indirectly does one of two things. [One], exercises substantial control over a reporting company. And again, “control” is a very important word here. Or two, owns or controls at least 25% of the reporting company's ownership interests. So, you know, a subsidiary has beneficial owners — may be senior officers or other individuals — who make important decisions for the subsidiary. That alone could constitute beneficial ownership. It could be anyone who indirectly exercises controls over the subsidiary. It could even be an individual who exercises control through their ownership of other entities to exercise control over that subsidiary. So there's quite a few nuances here that need to be considered. So definitely something to talk to your advisor about for sure.
Greg Corombos: Absolutely. And it's always helpful to have CT guiding folks through this as well. You mentioned a third exemption early on that you've received many questions on, and that is for what's known as inactive entities. How does a business know if it qualifies as an inactive entity under the Corporate Transparency Act?
Domingo Vazquez: The inactive entity exemption is quite narrow, really. To qualify for it, an entity needs to meet all of the following criteria. So it needs to have been in existence on or before January 1 of 2020. It needs to not actively engage in business. It needs to not be owned by a foreign person. It has to demonstrate that it hasn't experienced a change in ownership in the last 12 months, that it hasn't sent or received funds in an amount greater than $1,000 in the last 12 months. And really, that it doesn't hold any assets of any kind. So the bar I would say for this exemption is pretty high.
Greg Corombos: Well, Domingo, you've given us a lot to think about here and important clarity on where there are opportunities for exemptions here and where you're going to have to comply, particularly if your situation changes over time. Any final thoughts about what businesses need to consider as they go about making sure they're in compliance here?
Domingo Vazquez: Yeah, Greg, I again, I really appreciate the time. Thanks for having me. You know, I think the best advice I can give your listeners is to not wait. Get knowledgeable on the topic as soon as possible, and meet the reporting deadlines, because they're active. It's active, happening today. CT Corporation can certainly help. We have many resources to help companies learn more about the Corporate Transparency Act. We also have capabilities to help entities file BOI reports with FinCEN should they need to. And I'd also strongly recommend that listeners engage their legal and accounting advisors when making these final determinations about the reporting requirements for their entity. It can get quite nuanced. I always say it's better to be safe than sorry.
Greg Corombos: Yeah, no doubt, definitely talk to the people who know this stuff best. Whether that's an attorney, whether it's your accountant, or, again, the experts at CT Corp. So, Domingo, this has been, I think, a very helpful conversation for me and I'm sure many of our listeners as well about making sure you're in compliance with the CTA and knowing if you're eligible for the exemptions or not. Thank you very much for your time today. We greatly appreciate it.
Domingo Vazquez: Likewise, Greg. Thank you so much.
Greg Corombos: Domingo Vazquez is Vice President and Head of Corporations at CT Corporation. I'm Greg Columbus. And for more information on this topic, visit our resources page.
