Key takeaways:
- Privately held companies should become familiar with what a large operating company is under the Corporate Transparency Act.
- For an entity to be a large operating company, it must meet three criteria that have to do with the entity’s number of employees, its operating presence, and its gross receipts or sales.
- If an entity that qualified for the large operating company exemption ceases to qualify, it will have to file its initial report within 30 calendar days of when it ceased to qualify.
Effective January 1, 2024, every LLC, corporation, and other entity created by filing a document with a Secretary of State or equivalent office, or formed under the law of a foreign country and registered to do business by filing a document with a Secretary of State or equivalent office, is required to file a beneficial ownership information report with the Financial Crimes Enforcement Network (FinCEN) – unless that LLC, corporation, or other entity qualifies for an exemption. This is required by the Corporate Transparency Act (CTA), which requires the company to report certain information, including personal identifying information about every individual who is considered a “beneficial owner” of the company. (Basically, anyone who owns at least 25% or has significant authority or influence over important business decisions.)
Although the CTA has 23 exemptions, most do not apply to an “ordinary” business. Instead, most apply to companies already filing reports with the federal government that name beneficial owners, such as publicly traded companies and other entities registered with the Securities and Exchange Commission, or companies in heavily regulated industries such as financial institutions, public utilities, public accounting firms, and insurance companies.
There is an exemption that applies to privately held companies that are not necessarily already reporting beneficial ownership information or in a heavily regulated industry – and that is what the CTA refers to as a “large operating company”. FinCEN estimates that in 2024 there will be 321,357 entities qualifying for the large operating company exemption. All owners of privately held companies (as well as the lawyers advising them) should become familiar with this exemption and determine if their company is one of the those that qualify.
How do I determine if an entity is a large operating company?
There are three criteria that must be met for an entity to be a large operating company. The entity must meet all three to qualify. The criteria have to do with (1) the entity’s number of employees, (2) its operating presence, and (3) its gross receipts or sales.
1. Number of employees at a large operating company
A large operating company must employ more than 20 full time employees in the United States. In general, a full-time employee is, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer.
Employee headcounts are done at the level of each individual LLC, corporation, or other entity. FinCEN declined to permit companies to consolidate employee headcount across affiliated entities. Thus, for example, parent companies cannot count employees of their subsidiaries, or vice versa.
2. A large operating company’s presence within the United States
A large operating company must have an operating presence at a physical office within the United States.
The term “has an operating presence at a physical office within the United States” means that the company regularly conducts its business at a physical location in the United States that it owns or leases and that is physically distinct from the place of business of any other unaffiliated entity. (Although the final reporting rule itself is silent on the issue, it may be noted that FinCEN indicated in the Preamble to the final reporting rule that entities can qualify for this exemption if their physical presence in the United States consists exclusively of properties used as someone's residence.)
3. A large operating company’s gross receipts or sales
A large operating company must have filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales. This excludes gross receipts or sales from sources outside the United States.
For an entity that is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return, the applicable amount is the amount reported on the consolidated return for the group. (Note that while employee headcount cannot be consolidated among affiliates, gross receipts and sales can be consolidated.) The entity must have reported this greater-than-$5 million amount as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form.
What does it mean if an entity is determined to be a large operating company?
Entities that qualify for the large operating company exemption do not have to file a beneficial ownership information report. It is not necessary to apply for the exemption.
It is also important to know that there is an exemption for subsidiaries of certain exempt entities – including for subsidiaries of large operating companies. Therefore, a subsidiary would qualify for this exemption if its ownership interests are controlled or wholly owned, directly or indirectly, by a large operating company.
In addition, there is a special reporting rule for any beneficial owner whose ownership interests in a reporting company are held through one or more exempt entities. If this special rule applies, the reporting company may report the names of the exempt entities instead of the personal identifying information about that individual beneficial owner.
FinCEN’s Small Entity Compliance Guide provides the following example: A large operating company owns 50% of the ownership interests in a reporting company. Individual A owns 50% of the large operating company, and therefore owns 25% of the ownership interests in the reporting company. Individual A is therefore a beneficial owner of the reporting company. The reporting company may report the name of the large operating company instead of Individual A’s personal information.