Implications of the Corporate Transparency Act for physicians

By Allyn Rosenberger, JD, MPH, Jason Qu, JD, and Rob Portman, JD, MPP, April 1, 2024

Every month, DermWorld covers legal issues in “Legally Speaking.” This month’s authors are health care attorneys with Powers Pyles Sutter & Verville PC in Washington, D.C. Portman is also outside general counsel for the AAD and AADA.

A new federal law requires many health care business entities to disclose ownership information to the government or face stiff non-compliance penalties. Dermatologists who own their practices likely will be subject to these requirements and should familiarize themselves with the rules to ensure ongoing compliance.

Note: On March 1, 2024, a U.S. District Court in Alabama declared the CTA unconstitutional. The District Court’s opinion means the law is, for the moment, not in effect. However, the federal government will likely appeal and seek a stay of the decision while the appeal is decided. If a stay is granted, then the reporting requirements will remain in place. Even if a stay is not granted, if the District Court’s decision is ultimately overturned on appeal, the reporting requirements could be reinstated. Accordingly, covered business owners should continue preparing to timely file their BOI Reports. The Academy will monitor this litigation and update members on any developments.

To guide AAD members in that effort, the following article provides an overview of the relevant ownership disclosure requirements and their applicability.

Background

In 2021, Congress passed the Corporate Transparency Act (CTA) to strengthen the United States’ financial crimes monitoring system. Section 6403 of the CTA requires certain entities, including some health care entities, to disclose ownership information to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). On Jan. 1, 2024, FinCEN’s Beneficial Ownership Information Reporting Rule (BOI Rule), which implements these disclosure requirements, became effective. These disclosures are intended to combat opaque ownership structures that are often used to facilitate money laundering, corruption, tax fraud, and other financial crimes.

Who must file a BOI report?

The BOI Rule requires certain domestic and foreign entities, called “Reporting Companies,” to submit a BOI Report to FinCEN. The BOI Rule includes 23 exemptions from the definition of “Reporting Company” for entities already generally required to report beneficial ownership information under other federal or state laws. Notably, while exemptions exist for many nonprofits, subsidiaries of certain exempt entities, and large operating companies, many small-to-medium-sized companies — such as AAD members with independent practices — are not immune from the BOI Rule’s requirements. Furthermore, health care entities operating under the common friendly professional corporation (PC) model must carefully consider the BOI Rule’s applicability.

Physician practices

Most AAD members with their own practices will be required to comply with the BOI Rule. Two exemptions that may apply to certain physician practices include:

Large operating company exemption. The large operating company exemption to the BOI Rule applies to any business entity that: (1) has more than 20 full-time U.S. employees, (2) operates at a physical office in the U.S., and (3) generates more than $5 million in annual U.S. gross receipts as reported on the prior year’s federal tax filing. A physician practice that meets these requirements would be exempt from the reporting requirements.

Subsidiary exemption. The subsidiary exemption exempts an entity whose ownership interests are controlled or wholly owned, directly or indirectly, by another exempt entity. Accordingly, a physician practice could be exempt if its ownership interests were controlled or wholly owned by (1) entities registered under the Securities Exchange Act (e.g., a private equity fund), (2) tax-exempt entities (generally, 501(c)(3) organizations), (3) a large operating company, etc.

Friendly professional corporations

The corporate practice of medicine doctrine prohibits corporations from practicing medicine or employing a physician to provide professional medical services. Because most states prohibit the corporate practice of medicine, many health care companies are formed as a friendly PC to allow non-physicians to indirectly invest in a practice. Generally, the friendly PC model involves two parties: (1) a professional entity owned by one or more licensed professionals, and (2) a management services organization (MSO) that provides administrative services, but effectively controls the practice and often retains most of the revenues in management fees. As described in more detail below, absent an applicable exemption, the BOI Rule can apply to both professional entities and MSOs.

MSOs. The MSO contracting with a professional entity may itself be exempt from the BOI Rule under the large operating company exemption. Many MSOs will qualify for this exemption. If an MSO does not meet all three criteria of the large operating company exemption, it may still be exempt under the subsidiary exemption to the extent its ownership interests are controlled or wholly owned by another exempt entity such as, for example, a private equity fund.

Professional entities. A professional entity could be exempt under the large operating company exemption, though this circumstance will be uncommon. In addition, because individuals, as opposed to the MSO, typically own the professional entity, the professional entity generally will not be eligible for the subsidiary exemption. As such, many professional entities will be subject to reporting.

What information must be reported?

The BOI Rule requires a Reporting Company to identify itself and report four pieces of information about each “beneficial owner” that owns or controls the business: name, date of birth, address, and the image of an acceptable identification document containing a unique identifying number and the issuing jurisdiction. For new Reporting Companies created after Jan. 1, 2024, the BOI Rule requires reporting of the same four pieces of information and identification document image for each “applicant” responsible for filing the entity’s formation paperwork.

Such information should be filed through a secure filing system available via FinCEN’s BOI E-Filing website. Please note that there is no fee for submitting this information and reports will not be made publicly available, except under very specific circumstances.

When are BOI reports due and updated?

A Reporting Company created or registered to do business before Jan. 1, 2024, will have until Jan. 1, 2025, to file its initial BOI report.

A Reporting Company created or registered in 2024 will have 90 calendar days to file after receiving notice that its creation or registration is effective.

A Reporting Company created or registered on or after Jan. 1, 2025, will have 30 calendar days to file after receiving notice that its creation or registration is effective.

Reporting Companies must also report changes to the information contained in previous BOI reports within 30 calendar days of the change occurring. Reportable changes include: (1) changes affecting the corporate entity’s previously reported information, (2) changes to the identity of beneficial owners (including new controlling officers, new individuals with ownership interests over 25%, or the death, resignation, or removal of a beneficial owner), and (3) changes to a beneficial owner’s name, address, or previously reported ID number (along with a new ID image).

What are the penalties for non-compliance?

Both individuals and corporate entities can be held liable for willful violations of the BOI Rule in the form of civil penalties — including fines up to $500 per day for reporting violations (capped at $10,000) — or criminal penalties.

Conclusion

As of Jan.1, 2024, many dermatology practices are required to provide the federal government with information about who owns and controls the practice and must update the government when that information changes. While we have provided a general analysis of when a health care organization may be exempt from these requirements, an individual entity’s obligations must be analyzed on a case-by-case basis. We encourage practices to consult with their attorneys to ensure they comply with their reporting obligations.

This article is provided for informational and educational purposes and is not intended to provide legal advice and should not be relied upon as such. Readers should consult with their personal attorneys for legal advice regarding the subject matter of this article.

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