Who Is Exempt from Beneficial Ownership Reporting

November 23 , 2024

Under the Corporate Transparency Act, entities exempt from beneficial ownership reporting include government bodies, banks, credit unions, publicly traded companies, and certain tax-exempt organizations. This article outlines who is exempt from beneficial ownership reporting and the specific criteria they must meet.

Key Takeaways

• The Corporate Transparency Act mandates beneficial ownership reporting to increase transparency and combat financial crimes, but certain entities are exempt from these requirements.
• Exempt entities include government authorities, banks, large operating companies, tax-exempt organizations, and regulated financial institutions, which must meet specific criteria to qualify for exemption.
• Non-compliance with beneficial ownership reporting can result in significant penalties, including fines up to $10,000 and prison time for willful violations, underscoring the importance of understanding reporting obligations.

Overview of Beneficial Ownership Reporting

Beneficial ownership reporting aims to reduce the misuse of companies for illegal activities by requiring transparency in ownership structures. This initiative is rooted in the Corporate Transparency Act (CTA), which was enacted to enhance law enforcement’s ability to track down crimes like money laundering and tax evasion. The CTA seeks to deter money laundering, corruption, tax evasion, and other financial crimes by mandating the disclosure of beneficial ownership information.

Entities organized or registered to conduct business in the U.S. must disclose beneficial ownership information under the Corporate Transparency Act, ensuring the true owners are known and preventing the use of anonymous shell companies for illicit activities. The term “beneficial ownership” refers to individuals who directly or indirectly own or control a certain percentage of a company’s ownership interests.

A “reporting company” is any entity that falls under the CTA’s jurisdiction and is required to file beneficial ownership information. This includes both newly created and existing reporting companies. The reporting process requires filing a report with the appropriate authorities, detailing the company’s ownership interests and the individuals who hold them.

Compliance involves filing the report within a specific timeframe, typically within 30 days of the company’s creation. For existing reporting companies, there are periodic reporting requirements to ensure that the beneficial ownership information remains up-to-date.

The Corporate Transparency Act also outlines the penalties for non-compliance, which can be severe. Therefore, reporting companies must understand their obligations and file their reports accurately and on time. This transparency is not just a regulatory requirement; it’s a step towards a more transparent and fair business environment.

Key Exempt Entities

While the Corporate Transparency Act mandates disclosure for many entities, certain exempt entities are not required to file beneficial ownership information reports. These exemptions are designed to prevent unnecessary regulatory burdens on entities that are already subject to stringent oversight or have transparent ownership structures.

Here is a detailed list of the 23 types of exempt entities under the Corporate Transparency Act:

1. Security  Reporting Issuer

Entities qualify if they meet either of the following criteria:

• Registered as a securities class under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l).
• Mandated to submit supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)).

2. Government Authorities

Entities qualify for this exemption if:

• They are formed according to the statutes of the United States, an Indian tribe, a State, or a political subdivision, or through an interstate compact involving two or more States.
• They exercise governmental authority on behalf of the United States, an Indian tribe, a State, or a political subdivision.

3. Banks

Entities qualify for this exemption if they meet any of the following criteria:

• Defined as a “bank” under section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
• Classified as a “bank” as specified in section 2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)).
• Satisfy the definition of a “bank” under section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)).

4. Credit Unions

Entities qualify if they meet either of the following criteria:

• Defined as a “Federal credit union” in section 101 of the Federal Credit Union Act (12 U.S.C. 1752).
• Meet the “State credit union” criteria in section 101 of the Federal Credit Union Act (12 U.S.C. 1752).

5. Depository Institution Holding Companies

Entities qualify for exemption if they meet either of the following criteria:

• The entity meets the “bank holding company” definition outlined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841).
• The entity qualifies as a “savings and loan holding company” as described in section 10(a) of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)).

6. Money Services Businesses

Entities qualify if they meet either of the following criteria:

• Registered money-transmitting business with FinCEN under 31 U.S.C. 5330.
• Registered money services business with FinCEN under 31 CFR 1022.380.

7. Broker-Dealers

Entities qualify if they meet both of the following criteria:

• Defined as a “broker” or “dealer” under section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c).
• Registered under section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o).

8. Securities Exchange or Clearing Agency

Entities qualify for exemption if they meet both of the following criteria:

• The entity qualifies as an “exchange” or “clearing agency,” as delineated in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c).
• The entity is duly registered under sections 6 or 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78f, 78q-1).

9. Other Exchange Act Registered Entities

Entities qualify for this exemption if they meet both of the following criteria:

• They are not classified as a securities reporting issuer, a broker or dealer in securities, or a securities exchange or clearing agency, which are covered under other specific exemptions.
• They are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

10. Investment Company or Investment Advisers

Entities qualify if they meet both of the following criteria:

• Defined as an investment adviser under the Investment Advisers Act of 1940.
• Registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

11. Venture Capital Fund Advisers

Entities qualify if they meet both of the following criteria:

• Defined as an investment adviser in section 203(l) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(l)).
• Submitted the required schedules to the Securities and Exchange Commission.

12. Insurance Companies

Entities qualify if they meet the definition outlined in section 2 of the Investment Company Act of 1940 (15 U.S.C. 80a-2).

13. Insurance Producers

Entities qualify if they meet both of the following criteria:

• Authorized by a State and supervised by the insurance commissioner or an equivalent state official or agency.
• Maintain a physical office in the United States and conduct business operations regularly.

14. Commodity Exchange Act Registered Entities

Entities registered under the Commodity Exchange Act (CEA) with the Commodity Futures Trading Commission (CFTC) are exempt from filing Beneficial Ownership Information reports with FinCEN. To qualify, an entity must either:

1. Be classified as a “registered entity” under Section 1a of the CEA (7 U.S.C. 1a), or
2. Be registered with the CFTC as one of the following:
   • Futures commission merchant,
   • Introducing broker,
   • Swap dealer,
   • Major swap participant,
   • Commodity pool operator,
   • Commodity trading advisor, or
   • Retail foreign exchange dealer (as defined in Section 2(c)(2)(B) of the CEA).

15. Public Accounting Firms

Entities qualify if they are registered under section 102 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7212).

16. Regulated Public Utilities

Entities qualify if they meet both of the following criteria:

• Defined as a “regulated public utility” under 26 U.S.C. 7701(a)(33)(A).
• Offer telecommunications services, electricity, natural gas, or water and sewer services within the United States.

17. Financial Market Utilities

Entities qualify if they are identified as a financial market utility by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5463).

18. Pooled Investment Vehicles

Pooled investment vehicles are exempt from filing Beneficial Ownership Information reports with FinCEN if they meet the following criteria:

1. Entity Definition: The entity qualifies as a pooled investment vehicle by:
   • Being recognized as an investment company under Section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)); or
   • Meeting the conditions to be considered an investment company under the same section, excluding exclusions provided by paragraphs (1) or (7) of Section 3(c) of the Act.
2. Management or Advisory Relationship: The pooled investment vehicle is managed or advised by one of the following exempt entities:
   • A bank (Exemption #3),
   • A credit union (Exemption #4),
   • A broker or dealer in securities (Exemption #7),
   • An investment company or investment adviser (Exemption #10), or
   • A venture capital fund adviser (Exemption #11).

19. Certain Tax-Exempt Entities

Certain tax-exempt organizations are exempt from filing Beneficial Ownership Information reports with FinCEN. To qualify, an entity must meet one of the following criteria:

• Be described under Section 501(c) of the Internal Revenue Code (IRC) and exempt from tax under Section 501(a). Organizations that lose their tax-exempt status under these provisions remain exempt for 180 days after losing such status.
• Be a political organization as defined in Section 527(e)(1) and exempt under Section 527(a) of the IRC.
• Be a trust described in paragraph (1) or (2) of Section 4947(a) of the IRC.

20. Entity assisting a tax-exempt entity

Entities that exclusively support a tax-exempt organization (as defined in Exemption #19) may be exempt from filing BOI reports if they meet the following conditions:

• The entity’s sole purpose is to provide financial assistance to or hold governance rights over a tax-exempt entity.
• The entity is beneficially owned or controlled exclusively by real persons who are U.S. citizens or lawful permanent residents.
• A majority of the entity’s funding or revenue is derived from one or more U.S. persons who are U.S. citizens or lawful permanent residents.
• The entity is legally established and qualifies as a U.S. person under the Internal Revenue Code of 1986.

21. Large Operating Companies

Entities qualify if they meet all of the following criteria:

• Employ more than 20 full-time employees.
• Maintain an operational presence at a physical office within the United States.
• Filed a Federal income tax return for the previous fiscal year, demonstrating gross receipts or sales exceeding $5,000,000.

22. Subsidiaries of Exempt Entities

Entities that are controlled or wholly owned—directly or indirectly—by one or more entities described in specific exemptions also qualify for exemption from filing Beneficial Ownership Information reports. These parent entities include those listed under Exemptions 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 19, or 21.

This exemption ensures that subsidiaries of already-exempt organizations are not subject to duplicate reporting requirements.

23. Inactive Entities

Entities qualify if they meet all of the following criteria:

• Established on or before January 1, 2020.
• Not actively conducting business operations.
• Not owned, whether directly or indirectly, wholly or partially, by a foreign individual or entity. A “foreign person” refers to an individual or entity that is not considered a United States person, as defined in section 7701(a)(30) of the Internal Revenue Code of 1986. This includes citizens or residents of the United States, domestic partnerships and corporations, as well as certain estates and trusts.
• No changes in ownership within the preceding twelve-month period.
• Within the past twelve months, the entity has neither sent nor received funds exceeding $1,000, either directly or through any financial account in which the entity or any affiliated entity holds an interest.
• Does not possess any assets, whether within the United States or abroad, nor does it hold any ownership interests in corporations, limited liability companies, or similar entities.

These exemptions mean that qualifying entities are not required to file a beneficial ownership report unless they lose their exempt status. Each category has specific criteria that entities must meet to qualify for exemption, ensuring that only entities already under transparent oversight benefit from these exemptions.

Understanding these exemptions helps entities navigate the complexities of the Corporate Transparency Act and focus on their core operations without unnecessary regulatory burdens.

Penalties for Non-Compliance

Violating the Beneficial Ownership Information reporting requirements can occur through failure to file, submitting false information, or neglecting to update reported data. The Corporate Transparency Act enforces strict penalties to ensure compliance and deter violations.

Financial penalties for non-compliance are significant, ranging from $591 to $10,000 per infraction. For individuals who willfully violate the reporting requirements, civil fines can escalate to $591 for each day the violation persists, promoting timely compliance.

Moreover, failure to adhere to these requirements may result in imprisonment for up to two years. Criminal penalties for willful violations include imprisonment and fines up to $10,000, highlighting the critical nature of compliance.

Overall, non-compliance with beneficial ownership reporting can lead to severe civil or criminal repercussions. It’s imperative for entities to understand and fulfill their reporting obligations to avoid these substantial penalties.

How to Determine Your Exemption Status

Determining your exemption status is crucial to ensure compliance with the Corporate Transparency Act. Companies can utilize FinCEN’s Small Entity Compliance Guide, which includes flowcharts and checklists, to help identify if they are exempt from reporting requirements. This guide simplifies the process of determining exemption status by providing clear and concise steps.

Documentation requirements may vary based on exemption type, necessitating companies to provide specific forms of identification or evidence to substantiate their exempt status. Proper documentation ensures that entities can prove their exemption status if required by regulatory authorities.

If you’re unsure about your exemption status, it’s wise to consult with legal or compliance professionals who can help you navigate the complexities of the Corporate Transparency Act. Our dedicated team is here to support your business. We assist with the filing of Beneficial Ownership Information (BOI) reports and help determine if you need to file or qualify for exemption. Our personalized guidance ensures you fully understand your obligations and smoothly navigate the reporting process, helping you avoid any compliance pitfalls and providing you with peace of mind.

Accurately identifying and documenting exemption status helps entities avoid unnecessary reporting burdens and maintain compliance with regulatory requirements.

Summary

The importance of beneficial ownership reporting cannot be overstated. It aims to reduce the misuse of companies for illegal activities by requiring transparency in ownership structures. The Corporate Transparency Act enforces this transparency to deter money laundering, corruption, tax evasion, and other financial crimes.

Key exemptions under the Corporate Transparency Act include large operating companies, certain tax-exempt entities, and regulated financial institutions. These exemptions are designed to prevent unnecessary regulatory burdens on entities that already comply with other oversight requirements. Additional exemptions cover unique scenarios, ensuring that the act’s requirements are both comprehensive and fair.

Reporting requirements for exempt entities are crucial for maintaining compliance. Exempt entities must ensure they continuously meet exemption criteria, as changes in operational status or ownership may affect their exempt status. Non-compliance with beneficial ownership reporting can lead to severe civil or criminal penalties, emphasizing the importance of understanding and meeting these requirements.

In conclusion, understanding beneficial ownership reporting and exemptions is essential for ensuring compliance with the Corporate Transparency Act. By navigating these requirements effectively, entities can maintain transparency and contribute to a fairer, more transparent business environment.

 If you need assistance with Beneficial Ownership Information (BOI) filing or determining your exemption status, please don’t hesitate to contact us. Our expert team is here to guide you through the process and ensure you meet all regulatory requirements seamlessly.