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Corporate Transparency Act: 5 Things to Know (Taylor A. Stockemer Commentary)

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As of Jan. 1, the Corporate Transparency Act’s beneficial ownership reporting requirements are in effect.

Who is required to report? Every domestic entity created by filing a document with any governmental entity is potentially required to file reports under the CTA. Under Arkansas law, for example, corporations, limited liability companies and limited partnerships are legally created by filing with the secretary of state.

The CTA provides 23 separate exemptions from the reporting requirements. These include exemptions for banks, bank holding companies, most publicly traded companies and certain nonprofits. The law also exempts any entity that 1) employs 20 or more full-time employees in the United States, 2) had more than $5 million in gross receipts or sales during the most recently completed tax year, and 3) has a physical office in the U.S.

Every company should review these exemptions to determine whether a filing is required. We expect that most small privately owned entities will be required to file reports under the CTA.

What must be reported? The primary purpose of the CTA is to make entity ownership information available to law enforcement agencies. Thus, the CTA requires companies to report information on each of its “beneficial owners.”

For CTA purposes, a beneficial owner of an entity is any individual that, directly or indirectly, either 1) owns 25% or more of the equity interests of the entity, or 2) exercises substantial control over the activities of the entity. The regulations issued under the CTA contain various criteria in determining whether an individual is a beneficial owner. Each newly formed entity is also required to report information on its “company applicant,” the person responsible for filing its formation documents.

Once the beneficial owners are identified, the company must collect and report basic information about those individuals including name, date of birth, address and driver’s license or passport information.

Because of the potential significant penalties for failure to comply with the CTA, business owners should consider whether their existing governance documents should be modified to require assistance from individual beneficial owners whose personal information will be reportable.

When are reports required? For reporting companies formed prior to Jan. 1, 2024, the initial Beneficial Ownership Information Report is required prior to Jan. 1, 2025.

For reporting companies formed on or after Jan. 1, 2024, the initial BOIR must be filed within 90 days of formation. However, that filing period will be shortened to 30 days for companies formed on or after Jan. 1, 2025.

Any update or correction to information included in a previously filed BOIR must generally be submitted within 30 days after either the change occurred or the error was first known to the reporting company.

Where are reports filed? Reports must be filed with the Financial Crimes Enforcement Network. The agency’s online portal can be accessed at www.fincen.gov/boi.

What are the penalties for failure to report? The law provides that any person who willfully fails to comply or willfully provides false information may be subject to civil penalties of up to $500 per day and criminal penalties of up to $10,000 and two years in prison.

Taylor A. Stockemer is an attorney at Friday Eldredge & Clark of Little Rock. Email him at tstockemer@fridayfirm.com.
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