CareersCLIENT ALERT | BUSINESS SERVICES | OCTOBER 2024
Corporate Transparency Act Compliance for ESOPs
The Corporate Transparency Act (CTA), effective January 1, 2024, introduces new reporting requirements for certain corporations, limited liability companies, and other entities, including those owned by Employee Stock Ownership Plans (ESOPs). Entities formed before January 1, 2024, must file an initial Beneficial Ownership Information Report (BOIR) with the Financial Crimes Enforcement Network (FinCEN) by January 1, 2025. Understanding the CTA can help companies avoid significant penalties and ensure the continued operation of your ESOP.
Reporting Requirements
The CTA mandates that “reporting companies” provide specific identifying information. A reporting company includes any entity (corporation, limited liability company, or similar entity) created by filing a document with a Secretary of State. Reporting companies must disclose:
- The legal name, trade name (if applicable), principal place of business, and taxpayer identification number.
- Details of individuals who exercise substantial control or own/control 25% or more of the entity’s ownership interests. This includes their legal name, date of birth, residential address, and a unique identifying number from an acceptable identification document or a FinCEN identifier.
Penalties for Non-Compliance
Failure to comply may result in significant penalties, including fines up to $10,000 and imprisonment for up to 2 years for intentionally providing false or misleading information.
Legal Challenges and Compliance
Despite ongoing legal challenges questioning the CTA’s constitutionality, the reporting deadline remains unchanged. As of July 2024, only 2.7 million of the estimated 31 million initial filings have been received. Companies should prepare to file by the deadline.
Exemptions
The CTA exempts 23 types of entities, including large operating companies with more than 20 full-time employees and annual gross receipts or sales of at least $5 million. However, this exemption is contingent on all employees being employed by the same entity, which can pose issues for ESOPs operating under a holding company structure.
If a holding company does not meet the large operating company criteria, it may not be exempt. However, if a holding company qualifies, the subsidiary company might be exempt.
ESOP Trustees: Individual trustees may not qualify for exemptions, but large institutional trustees might meet the large operating company exemption, allowing the holding company to qualify as a subsidiary.
Recommendations
Given the complexities and ambiguities, consider the following:
- File the BOIR by the deadline;
- Submit the BOIR for the holding company and any other affected entity by January 1, 2025, (unless a clear exemption applies);
- Consult with a professional to ensure compliance and determine if any exemptions are applicable; and
- Prepare for ongoing reporting obligations and potential updates or corrections.
If you have any questions regarding the matters covered in this alert, please reach out to the lawyer(s) listed below or your usual Walter Haverfield contact.
Alex Kuzmik | Associate | Tax & Wealth Management | 216.619.7883 | akuzmik@walterhav.com
Tim Jochim | Partner | Business Services | 614.246.2152 | tjochim@walterhav.com
This communication is for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice. This may be considered attorney advertising in some jurisdictions.