The Corporate Transparency Act (the “CTA”), part of the federal government’s effort to curtail money laundering by means of shell company structures, imposes disclosure requirements on most entities registered to do business in the United States.  As discussed in other Ruder Ware CTA Focus Team insights, there is a presumption that all entities are bound by these new disclosure rules. However, the CTA carves out and exempts twenty-three different categories of entities from the regime.  Many of these exempt entities consist of the kinds of companies already subject to rigorous regulatory attention, including certain financial institutions, accounting firms, and publicly traded companies.

“Large operating companies” constitute one of these twenty-three exempt categories of entities. To qualify as a large operating company, an entity must meet all the following requirements:

1. Employ more than 20 full-time employees in the U.S. who work an average of at least 30 hours per week.
2. Maintain a physical office in the United States where business is regularly conducted.
3. Have filed a federal income tax return in the U.S. for the previous year showing more than $5,000,000 in gross receipts or sales. Gross receipts and sales from outside the U.S. are excluded from this figure.

Failure to satisfy any of the foregoing criteria at any time will result in an entity’s loss of its large operating company exemption.  Take XYZ, LLC as an example: This small hypothetical manufacturing firm has 35 full-time employees and annual sales exceeding $7 million from operations in the U.S.  As such, it satisfies the large operating company exemption and does not have a reporting obligation under the CTA.  But if macroeconomic turbulence forces XYZ, LLC to lay off 20 employees, dropping its full-time employment number below the 20-employee threshold, the company will immediately lose its exemption and will need to file an appropriate CTA beneficial ownership report within 30 days of the event that caused it to lose its exemption (that is, within 30 days of the lay-off).

It is also important to note that the exemption requirements must be applied to one entity at a time, not across a broader group of affiliated companies.  Take XYZ, LLC as an example yet once more: Suppose XYZ, LLC is a wholly owned subsidiary of XYZ Holdings, Inc.  Because the federal income tax return is filed at the holding company level, XYZ, LLC does not satisfy the federal income tax return requirement.  And because all employees are employed at the operating company level with XYZ, LLC, the holding company does not satisfy the minimum employee requirement.  As a result, neither XYZ, LLC nor XYZ Holdings, Inc. qualifies for the large operating company exemption.  Both have reporting obligations under the CTA.

McKenna Coffeen, summer associate, contributed to this blog post.