Implications of the Corporate Transparency Act for Health Care Companies

As part of Ropes & Gray’s ongoing efforts (see here) to advise on the impact of the Corporate Transparency Act (“CTA”), this Alert focuses on considerations for health care companies navigating the CTA’s recently enacted Beneficial Ownership Information Reporting Rule (“BOI Rule” or the “Rule”), effective as of January 1, 2024.

Enacted in 2021, the CTA is designed to strengthen the United States’s financial crime monitoring system by, among other things, requiring certain entities, including health care entities, to disclose identifying information about themselves, their beneficial owners, and their control persons to the U.S. federal government. The BOI Rule is intended to expand the U.S. government’s ability to collect beneficial ownership information to deter money laundering, corruption, tax evasion, fraud, and other financial crimes. In this Alert, we consider the potential reporting requirements in accordance with the BOI Rule for health care companies including hospitals and health systems and companies that provide services under common health care structures, such as joint ventures (“JVs”) or the friendly professional corporation (“PC”) model.

The Rule requires any corporation, limited liability company or other entity created—or registered to conduct business—by the filing of a document with a secretary of state of any U.S. state to report information about its “beneficial owners” to the Financial Crimes Enforcement Network (“FinCEN”), unless the legal entity falls within one of 23 enumerated exemptions (each entity subject to reporting, a “Reporting Company”). The CTA requires Reporting Companies formed prior to January 1, 2024 to report on their beneficial ownership by January 1, 2025; whereas Reporting Companies formed between January 1, 2024 and December 31, 2024 have 90 days from notice of the entity’s formation to comply with reporting obligations.¹

A Reporting Company must register and disclose for each beneficial owner: (i) full legal name, (ii) date of birth, (iii) current residential address, (iv) unique identifying number from a non-expired U.S. passport, state identification document or state driver’s license; and (v) image of the document showing the unique identifying number.²

Once a Reporting Company has filed an initial report with FinCEN, the company is required to notify the U.S. government of any changes in previously reported information by filing an updated report with FinCEN within 30 days of the relevant change. Willful failure to comply with the BOI Rule’s reporting requirements may result in civil or criminal penalties as described in more detail below.

Who is a “Beneficial Owner”?

For reporting purposes, a beneficial owner includes those individuals who directly or indirectly, (i) own or control at least 25% of the ownership interests³ of the Reporting Company; or (ii) exercise substantial control over the Reporting Company, which can require a facts-and-circumstances analysis. Under the BOI Rule, individuals are deemed to exercise substantial control over a Reporting Company if they:

1. serve as a senior officer (e.g., a president, chief financial officer, general counsel, chief executive officer, or chief operating officer) of the Reporting Company;
2. have authority over the appointment or removal of any senior officer or a majority of the Reporting Company board;
3. direct, determine, or have substantial influence over key decisions made by the Reporting Company (e.g., decisions about the Reporting Company’s business, finances, and structure); or
4. exercise any other form of substantial control over the Reporting Company.

The BOI Rule requires reporting companies to disclose every individual that exercises substantial control over a Reporting Company, and FinCEN expects that every Reporting Company will identify at least one beneficial owner who exercises substantial control.

Given that (1) FinCEN may publish additional interpretative guidance during 2024; and (2) the filing of an initial report triggers the ongoing obligation to file updated reports, companies may decide to postpone filing determinations for existing legal entities (i.e., those created or registered prior to January 1, 2024) until closer to the January 1, 2025 reporting deadline.

Applicability to Friendly PC Model

The BOI Rule applies to U.S.-organized management services organizations (“MSOs”), PCs or similar professional entities, absent an available exemption.

Health care companies commonly are structured under the friendly PC model. Under this model, a PC owned by a health care provider (e.g., physician or dentist) enters into a management services agreement with an MSO under which the PC maintains control over all clinical aspects of the practice, including care delivery and clinical staff hiring. The MSO, on the other hand, provides back-end management and administrative services to the PC.

Of the 23 available exemptions to the BOI Rule’s reporting requirements, the exemptions for “large operating companies” and “subsidiaries” may be relevant to the friendly PC model:

1. Large Operating Company Exemption: The large operating company exemption applies to any entity that: (i) directly employs more than 20 full-time employees in the United States; (ii) has an operating presence at a physical office in the United States; and (iii) filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million of gross receipts or sales. While the greater than $5 million threshold applies on a consolidated basis, FinCEN declined to permit companies to consolidate employee headcount across affiliated entities for purposes of meeting the more than 20 full-time employee threshold.
2. Subsidiary Exemption: The subsidiary exemption applies to any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by specified exempt entities (including large operating companies).

Notably, the BOI Rule does not define “control” for purposes of determining applicability of the subsidiary exemption. In addition, in the preamble to the BOI Rule, FinCEN stated that it considered—but declined—to extend the subsidiary exemption to all entities that are “majority owned” by one or more qualifying exempt entities, citing concern that a broader interpretation could enable entities to shield otherwise reportable beneficial owners. This, in turn, suggests that majority ownership by an exempt entity may not be sufficient to qualify for the subsidiary exemption, at least in circumstances where application of the subsidiary exemption would result in shielding of otherwise reportable beneficial owners from disclosure. Therefore, application of the subsidiary exemption to non-wholly owned entities requires an individualized assessment (as illustrated below).

MSOs

Many MSOs will be exempt from reporting as large operating companies. If an MSO does not meet all three criteria of the large operating company exemption, the MSO may be exempt under the subsidiary exemption, to the extent the MSO’s ownership interests are controlled or wholly owned by a qualifying exempt entity. For example, depending on the facts, an MSO that is indirectly owned by a private equity fund and whose ownership interests are controlled by an exempt investment adviser may be exempt from reporting under the subsidiary exemption.⁴ However, as noted above, application of the subsidiary exemption to non-wholly owned entities requires an individualized assessment.

Professional Entities or PCs

While some PCs are unlikely to meet all three criteria of the large operating company exemption because of their size (e.g., needing more than 20 full-time employees and greater than $5 million gross receipts or sales in the prior tax year), some may meet the required criteria to qualify for the exemption, especially if they are consolidated with the MSO for tax purposes. Note, however, that the PC cannot consolidate across entities to meet the more than 20 full-time employee threshold. Additionally, because individuals, as opposed to the MSO, typically own the PC, the PC will generally not be eligible for the subsidiary exemption. As such, many professional entities, such as PCs and professional limited liability companies, may be subject to reporting.

For a typical PC, persons subject to reporting would include (1) 25% or greater natural person beneficial owners (e.g., physician, dentist, or other clinical owners) and (2) control persons (including senior officers of the PC). Further, MSOs should review the terms of any MSO arrangements with reporting PCs to determine whether there are any individuals who may have substantial control over the business operations of the PC under these agreements.

Applicability to JVs

JVs are a common structure utilized by health care companies for the delivery of services or other strategic health care goals. JVs may qualify for a range of exemptions depending on their ownership and control structures, among other criteria. For example:

1. Private equity (“PE”)-backed JV where the PE Partner is the majority owner, and a health care company partner is the minority owner.

   These types of JVs exist in the health care industry including in the primary care space. This type of JV typically does not have 20 full-time employees, and therefore (if true), would not satisfy the large operating company exemption. If no natural person affiliated with the minority owner (1) owns or controls 25% or more of the JV; or (2) exercises substantial control over the JV, there may be a basis to treat the JV as exempt as a subsidiary of the PE Partner (to the extent the PE Partner is itself exempt). However, to the extent the PE Partner is not exempt, or a natural person affiliated with the minority owner meets either of the foregoing criteria, then it may be prudent to treat the JV as a reporting company.

2. A JV where the PE-backed management company is the majority owner, and the friendly physician/shareholder is the minority owner.

   These JVs are common in the kidney care/renal industry and practice management platforms in the dental and other healthcare industries. The reporting company analysis for these JVs would largely track the analysis described in #1 above. However, for these JVs, the minority owner (physician/shareholder) is more likely to be a small, passive investor (who does not qualify as a beneficial owner in their own right). As a result, more of these JVs may be eligible for the subsidiary exemption as compared to the example discussed in #1 above.

3. True strategic JV where the JV is owned equally by both parties, and both parties to the JV have substantial control over key business decisions.

   Certain JVs in the health care space involve two or more partners, both of which are required to vote on key decision-making. In many cases, such JVs will not employ more than 20 full-time employees. If both JV partners are exempt from the reporting requirements, these JVs may qualify as exempt subsidiaries. However, if one or both JV partners is not exempt, the JV is unlikely to qualify for the subsidiary exemption (as individuals affiliated with the non-exempt JV partner are likely to be deemed to exercise substantial control).

4. Ancillary JVs where the majority partner is a tax-exempt company or a wholly owned subsidiary of a tax-exempt company and maintains substantial control of the business.

   There has been an increase in JVs that involve a partnership of nonprofit and for-profit organizations, for example in the value-based care space. In JVs involving a tax-exempt partner, the tax-exempt partner likely will be exempt from reporting under the tax-exempt exemption (discussed below), in which case the JV may be exempt as a subsidiary of a tax-exempt entity assuming no individual associated with a non-exempt, for-profit JV partner exercises substantial control.

Importantly – each JV scenario will require careful consideration given (as noted above) that FinCEN declined to extend the subsidiary exemption to all entities that are “majority owned” by one or more qualifying exempt entities, citing concern that a broader interpretation could enable entities to shield otherwise reportable beneficial owners. As such, application of the subsidiary exemption to non-wholly owned entities requires an individualized assessment.

Applicability to Hospitals and Health Systems

Hospitals and health systems may be exempt from reporting under the large operating company and/or tax-exempt entity exemptions. A tax-exempt entity that meets the description of the Internal Revenue Code of 1986 (“Code”) and is exempt from tax under section 501(a) of the Code is eligible for exemption due to its tax-exempt status. Therefore, nonprofit hospitals and health systems meeting these requirements would be exempt from reporting requirements under the CTA. Tax-exempt entities that lose their tax-exempt status have a 180-day grace period before losing their CTA reporting exemption. Controlled or wholly owned subsidiaries of tax-exempt entities are also exempt from reporting under the CTA.

Applicability to Public Companies

Health care companies that are publicly traded or Securities and Exchange Commission (“SEC”) reporting issuers are also exempt from reporting obligations, as are controlled or wholly owned subsidiaries of these companies.

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The reporting obligations under the CTA must be analyzed on a case-by-case basis. We provide a general analysis of the typical arrangement under the friendly PC model, JVs, and other health care companies; however, we recommend that health care companies seek guidance and individually analyze their arrangements to ensure compliance with the reporting obligations.

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R&G continues to monitor updates from FinCEN related to obligations under the CTA. If you have any questions, please consult your Ropes & Gray adviser.