September 26, 2023
Due Diligence: Check Compliance with the Corporate Transparency Act
Over on TheCorporateCounsel.net, John and Dave have blogged about FinCEN’s rules for reporting beneficial ownership information under the Corporate Transparency Act and FinCEN’s recently released Small Entity Compliance Guide. As John and Dave shared, the new reporting requirements are far-reaching and create new federal filing requirements applicable to various entities (including operating companies, holding companies, LLCs and others).
This DLA Piper alert describes the mechanics of the rule, exempt entity types, key definitions, required information and timing of the reporting requirement. It notes that, following effectiveness, prospective buyers should consider whether target companies are required to report and whether they’re in compliance. The alert describes one important exemption that will be relevant to many non-public acquisition targets, depending on their size:
[A] “large operating company” is also exempt if the entity employs more than 20 employees on a full-time basis in the US, has filed a federal US income tax return for the year prior showing more than $5 million in gross receipts or sales (not including receipts and sales from sources outside of the US), and operates from physical office premises in the US.
This exemption will only benefit well-established businesses, as startup entities will be unable to satisfy the requirements associated with prior year tax filings. An entity that initially qualifies for the large operating company exemption but subsequently fails to meet the criteria for such exemption will need to file a beneficial owner report. Conversely, if an entity is initially determined to be a reporting company but then qualifies for the large operating company exemption, that entity must file an updated report noting such change.
The Dechert alert John shared on TheCorporateCounsel.net noted that “any business entity owned or controlled by a business entity that is itself exempt from the beneficial ownership disclosure” is also exempt, with limited exceptions. FinCEN refers to these as the “large operating company exemption” and the “subsidiary exemption.”
– Meredith Ervine