What this is: The Corporate Transparency Act (CTA) includes 23 exemptions to its Beneficial Ownership Information (BOI) reporting requirements. In this article, we explore the details of the “Large Operating Company” exemption.
What this means: Many of the exemptions to the CTA’s BOI reporting requirements apply only to specific industries or to entities that are already heavily regulated. The Large Operating Company exemption, however, can be applicable to a regular business entity if it meets all of the exemption’s requirements.
There are 23 exemptions to the beneficial ownership reporting requirements of the Corporate Transparency Act. If a “Reporting Company,” as defined in the CTA, meets the requirements of one or more of those exemptions, it is not required to file a beneficial ownership report with the Financial Crimes Enforcement Network (FinCEN). Many of the CTA’s 23 exemptions apply to industries that are already heavily regulated, such as public accounting firms, financial institutions, insurance companies, certain tax-exempt entities and public utilities. There are, however, certain exemptions that are not industry specific, such as the Large Operating Company exemption, which is discussed below.
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To Qualify for the Large Operating Company Exemption, What Criteria Must Be Met?
To qualify for the Large Operating Company exemption, a Reporting Company:
- Must employ more than 20 full-time employees in the US; in general, “full-time employee” means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with the employer;
- Must have filed in the previous tax year federal income tax returns in the US demonstrating more than $5 million in gross receipts or sales in the aggregate; and
- Must have an operating presence at a physical office within the US. According to FinCEN’s Small Entity Compliance Guide, “Operating presence at a physical office within the US” means that an entity regularly conducts its business at a physical location in the US that the entity owns or leases and that is physically distinct from the place of business of any other affiliated entity.”
Importantly, for the exemption to apply, the Reporting Company must meet all 3 of the criteria described above. For the first prong, “Employ more than 20 full-time employees in the US,” the Reporting Company cannot include employees employed by affiliated entities to meet the more than 20 full-time employee headcount. For example, if a parent Reporting Company has only 10 employees, it cannot combine its number of employees with its subsidiary company’s number of employees to meet the more-than-20-full-time-employee threshold, and the subsidiary reporting company cannot combine its number of employees with its parent company.
Conversely, to satisfy the requirement in the second prong of “more than $5 million in gross receipts or sales,” if a Reporting Company is part of an “affiliated group of corporations” within the meaning of 26 U.S.C. 1504, it can refer to the consolidated tax return for such group. However, the over $5 million threshold amount must be from gross receipts or sales from sources within the US. And, implicit in the second prong is that a newly formed Reporting Company cannot meet the criteria until it has been in business long enough to have filed a federal tax return for the previous year demonstrating “the more than $5 million in gross receipts or sales in the aggregate.”
Does a Reporting Company That Meets the Criteria for the Large Operating Company Exemption Need to File Anything With FinCEN?
A Reporting Company that meets the criteria for the Large Operating Company exemption does not need to file a BOI report or anything else with FinCEN. Exempt Reporting Companies are not required to file BOI reports with FinCEN, nor are they required to submit filings claiming their exemption. However since the CTA comes with strict civil and criminal penalties for non-compliance, it is essential to confirm whether an exemption applies to a particular Reporting Company before relying upon the exemption.
What Happens if a Reporting Company No Longer Meets the Requirements of the Large Operating Company Exemption?
If at some point an exempt Reporting Company ceases to qualify for its exemption, it must file an initial BOI report with FinCEN within 30 days of when it stops meeting any of the exemption criteria. For example, if a Reporting Company that once met all of the requirements of the Large Operating Company exemption decreases its number of “full-time employees” in the US to fewer than 21, or moves its “operating presence at a physical office in the US” to somewhere outside of the US or otherwise fails to meet all of the criteria for the exemption, then the exemption no longer applies and the Reporting Company must comply with the CTA’s BOI reporting requirements. This includes filing an initial BOI report with FinCEN and keeping it up to date in accordance with the CTA’s implementing regulations.
What Happens if a Non-Exempt Reporting Company That Has Already Filed a BOI Report Later Meets the Criteria for the Large Operating Company Exemption?
If a non-exempt Reporting Company that has filed its BOI report later meets the criteria for one or more of the CTA’s exemptions, including the Large Operating Company Exemption, it has 30 days to file an updated report indicating it is newly exempt. The updated BOI report for a newly exempt entity only requires the Reporting Company to identify itself and check a box indicating that it is newly exempt; the Reporting Company does not need to state which exemption it falls under. Thereafter, the Reporting Company no longer must keep its BOI report up to date with FinCEN, unless at some point it ceases to be exempt. However, if any of the “beneficial owners” of a reporting company choose to obtain a “FinCEN Identifier,” those individuals will still be required to notify FinCEN within 30 days of any changes to the personal identifying information that they provided to FinCEN in order to obtain the FinCEN identifier.
Currently, FinCEN’s final rules for BOI reporting do not include a mechanism for retiring or suspending a FinCEN identifier; although FinCEN states in its FAQs that it is considering allowing for this. Specifically, FinCEN’s FAQ M6 states: “FinCEN is actively assessing options to allow individuals to deactivate a FinCEN Identifier so that they do not need to update the underlying personal information on an ongoing basis. FinCEN will provide additional guidance on this functionality upon completion of that process.” Cogency Global's CTA Team is actively monitoring FinCEN’s FAQs for updates regarding FinCEN Identifiers.
For further information on the CTA’s 23 exemptions, see FinCEN’s Small Entity Compliance Guide at FinCEN.gov. For a preliminary assessment of whether any exemptions apply to a particular Reporting Company, see Cogency’s CTA Exemption Wizard.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
