The Large Operating Company Exception to the CTA
Our loyal followers are now well familiar with the Corporate Transparency Act (“CTA”), a law that went into effect on January 1, 2024 that requires non-exempt “Reporting Companies” to file a report with the U.S. Financial Crimes Enforcement Network (“FinCen”). Our prior client alerts have explained the CTA and the many exceptions to the reporting requirements. Today’s alert covers the exemption for large operating companies.
The large operating company exception appears straightforward at first. Entities are exempt from reporting if they:
- Employ more than 20 full-time employees in the United States;
- Have an operating presence at a physical office within the United States; and
- Filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales.
Easy enough, right? Not so fast.
We’ve worked with a number of clients as they navigated the large operating company exemption, and specifically the first factor. FinCen relies on IRS regulations to define “full time employee in the United States”: “The term 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 an employer.” One hundred thirty hours of service in a calendar month “is treated as the monthly equivalent of at least 30 hours of service per week[.]”
But who, exactly, is an “employee”? According to FinCen guidance and IRS regulations, an “employee” is an individual who is an employee under the common-law standard. Although the regulation clarifies that leased employees, sole proprietors, partners in a partnership, and 2% S corporation shareholders are not employees, the definition is still about as clear as mud.
Never fear, we’re here to help. Under the “common-law standard,” an employer/employee relationship exists “when the person for whom services are performed [i.e., the employer] has the right to control and direct the individual who performs the services [i.e., the employee], not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.” In other words, if the company has the right to control the worker’s work (even if that right is not exercised), an employer/employee relationship exists and the worker is a common-law employee.
As you can appreciate, the question of “do you have 20 full-time employees” is not as simple as it initially appears. These are complex, fact-based issues that we recommend discussing with your legal counsel before you make any decisions about your entity’s qualification for the large operating company exemption.
We’ll end this post with a bit of clarity: a number of clients that own a group of related companies have asked if they can consolidate employees across the companies to meet the criteria of the large operating company exemption. FinCen advice is clear on this: the answer is “no.” According to FinCen, the large operating company exemption requires the entity itself to employ more than 20 full-time employees in the United States – employees cannot be consolidated across related entities to meet the exemption.
Please contact your Miller Johnson attorney or a member of the Miller Johnson CTA task force if you need assistance in analyzing whether your entity qualifies for the large operating company exemption – or with any other issue related to the Corporate Transparency Act.