Corporate Transparency Act: Subsidiary Exemption, Community Property, Conversions

BACKGROUND
The federal Corporate Transparency Act (CTA) went into effect on January 1, 2024, and is intended to prevent certain financial crimes, such as money laundering and tax fraud. Under the CTA, entities that qualify as “reporting companies” are required to report certain information about their “beneficial owners” (referred to as beneficial ownership information, or “BOI” for short) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury.

To assist entities in complying with the CTA, FinCEN has been issuing guidance through regular updates to its BOI Frequently Asked Questions, which can be found here: Beneficial Ownership Information Frequently Asked Questions. Recently, FinCEN issued guidance on three important topics: (1) the subsidiary exemption, (2) determining the beneficial owners of an entity that was formed in a community property state and (3) how an entity’s reporting obligations are affected by a conversion of the entity. The guidance is discussed in further detail below.

SUBSIDIARY EXEMPTION
There are currently 23 exemptions from the reporting requirements of the CTA. To qualify for the subsidiary exemption, an entity’s ownership interests must be 100% owned or controlled, directly or indirectly, by one or more certain exempt entities (such as a “large operating company” as defined under the CTA). FinCEN clarified that a subsidiary owned by multiple parent entities can qualify for the subsidiary exemption even if the parent entities are exempt entities for different reasons (e.g., one is a “large operating company” and the other is a bank). FinCEN also clarified that a subsidiary’s parent entities do not need to be affiliated with each other for the subsidiary to qualify for the subsidiary exemption.

COMMUNITY PROPERTY
A person is a beneficial owner of an entity if the person owns or controls at least 25% of its ownership interests. FinCEN clarified that if the person is married and the entity was formed in a community property state, the person’s spouse may also be considered a beneficial owner if, under the applicable state law, both spouses are considered to own or control at least 25% of the ownership interests.

CONVERSIONS
Using one of several methods, an entity may convert to a different type of entity (such as from limited liability company to corporation). FinCEN clarified that if an entity files its initial BOI report and subsequently undergoes a conversion, the entity may have to file a new initial BOI report if, under the applicable state law, the conversion resulted in the creation of a new entity.

NEXT STEPS
The attorneys at Dvorak Law Group are closely monitoring guidance from FinCEN regarding the CTA, and they are ready to advise you on the latest developments and how your business may be impacted. If you would like assistance in reviewing whether you need to file a BOI report, the attorneys at Dvorak Law Group are prepared to assist you in reviewing the reporting requirements and in completing and filing a BOI report.