Corporate Transparency Act: Considerations for joint ventures

Subsidiary exemption from the Corporate Transparency Act

There are 23 exemptions from CTA reporting requirements. These exempt entities include publicly traded companies that meet specified requirements, certain non-profits, and more.

A subsidiary qualifies for the "subsidiary of certain exempt entities 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 issuers
• Governmental authorities
• Banks
• Credit unions
• Depository institution holding companies
• Brokers or dealers in securities
• Securities exchanges or clearing agencies
• Other exchange act registered entities
• Investment companies or investment advisers
• Venture capital fund advisers
• Insurance companies
• State-licensed insurance producers
• Commodity Exchange Act registered entities
• Accounting firms
• Public utilities
• Financial market utilities
• Tax-exempt entities
• Large operating companies (20 or more employees and $5 million in gross receipts)

Entities that are subsidiaries of the following exempt entities - money service businesses, pooled investment vehicles, entities assisting tax-exempt entities, and inactive entities - are not themselves exempt under the subsidiary exemption.

In addition, to qualify for the subsidiary exemption, the subsidiary must be entirely owned or controlled by one or more exempt entities. Per FinCEN: “If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify. To qualify, a subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity.”

Defining ownership under the CTA

A beneficial owner is defined as the following:

1. An individual who exercises substantial control over the reporting company
   
   Or:

2. An individual who owns or controls at least 25% of the reporting company’s ownership interests.

If the individual falls into any of the categories below, the individual is exercising substantial control:

• The individual is a senior officer
• The individual has the authority to appoint or remove certain officers or directors
• The individual is an important decision-maker for the reporting company.

“Ownership interest” can mean:

1. Any equity, stock, or similar instrument; preorganization certificate or subscription; or transferable share of, or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust (regardless of whether the instrument is transferable, is classified as stock or anything similar, or confers voting power or voting rights).
2. Any capital or profit interest.
3. Any instrument convertible into any share or instrument described in (A) or (B), any future on any such instrument, or any warrant or right to purchase, sell, or subscribe to a share or interest described in (A) or (B), regardless of whether characterized as debt.
4. Any put, call, straddle, or other option or privilege of buying or selling any of the items described in (A), (B), or (C) without being bound to do so, except to the extent that such option or privilege is created and held by a third party or third parties without the knowledge or involvement of the reporting company.
5. Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

Furthermore, ownership may be direct or indirect. An individual can own or control an ownership interest in a reporting company directly or indirectly through contracts, arrangements, understandings, relationships, or joint ownership with others.

Establishing compliance responsibilities

When entering into a joint venture, you must establish who maintains entity compliance and understand compliance deadlines. Key filing requirements to know for reporting companies are as follows:

• Existing companies – Domestic reporting companies created before January 1, 2024, and foreign reporting companies registered to do business in the U.S. before January 1, 2024, must file a beneficial ownership information report (BOIR) with FinCEN by January 1, 2025.
• New companies – Domestic reporting companies created on or after January 1, 2024 and foreign reporting companies first registered on or after January 1, 2024, must file an initial BOI report within 90 calendar days after receiving notice of the company’s creation or registration.
• New companies created or first registered on or after January 1, 2025 - Have 30 calendar days after receiving notice of the company’s creation or registration to file an initial BOI report.

In addition, if there is any change to the information provided about the reporting company or its beneficial owners, including who they are, the reporting company must file an updated BOI report with FinCEN within 30 calendar days of the change. Likewise, if any of the information filed is inaccurate, a corrected BOI report must be filed within 30 calendar days of when the company became aware of, or should have become aware of, the inaccuracy.

To navigate these compliance complexities, several steps are required:

• Determine if an entity qualifies for an exemption
• Verify business entity data
• Determine ownership
• Gather and safely store sensitive beneficial owner information
• Obtain a FinCEN ID (optional and can be for an individual, an entity, or both)
• Monitor for entity and ownership changes and file an updated report with FinCEN

Updating governing agreements and ensuring confidentiality in BOI reporting

Existing documents, agreements and templates governing joint ventures should be updated to disclose the party responsible for ensuring joint venture entity compliance with the CTA. You should also establish a way to provide filed BOI reports to the other parties in the joint venture. Because these details include sensitive information about beneficial owners – including legal name, date of birth, residential address, and the number from their driver's license, state or local ID, or passport, and an image of the document – you must make certain the process is confidential.

To simplify the reporting process and limit the sharing of sensitive information with FinCEN, you may want to recommend that beneficial owners obtain a FinCEN ID. However, make sure you tell them about their responsibility to update FinCEN with any changes in their reported information.

Furthermore, an entity management platform can help streamline this process and ensure compliance by unifying data into a single source of truth.

Termination of a joint venture and the Corporate Transparency Act

When a joint venture is terminated, typically through a partner buyout, termination conditions in the joint venture agreement should stipulate how the transaction plays out. If there is a change in beneficial ownership or any other information reported about the company or its beneficial owners during this process, you must file an updated BOI report.

Be sure to develop and document the termination process whether it involves dissolution, sale, or spinoff. Dissolution requires filings and withdrawals, obtaining tax clearances, filing annual reports, and cancelling business licenses and DBA names. For a sale or spinoff, it is essential to file amendments and submit updated BOI reports to ensure compliance.

Lastly, FinCEN requires any domestic reporting company that existed for a period of time on or after January 1, 2024, and any foreign reporting company registered in the U.S. for a period of time on or after January 1, 2024, to file an initial BOI report, even if it dissolves or terminates or ceases to be registered in the U.S. before the initial report was due.

Others in the series:

Corporate Transparency Act: Best practices for beneficial ownership information reporting
Corporate Transparency Act: Ongoing compliance for reporting companies
Corporate Transparency Act implications for bankruptcy cases

Learn more

Act now to ensure CTA compliance in joint ventures. CT’s secure and automated Beneficial Ownership Information (BOI) solution streamlines the compliance process and reduces filing times and errors. Get organized, save time, and file today!