The Corporate Transparency Act (CTA) was enacted in 2021, but implementation of the new law was delayed on several occasions. As of January 1, 2024, however, the CTA’s beneficial ownership reporting requirements are in effect. This alert reviews critical points every business owner should consider in determining the steps necessary to comply.
Who is required to report?
Every domestic entity created by filing a document with any governmental agency 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 twenty-three separate exemptions from the reporting requirements. These include exemptions for banks, bank holding companies, most publicly traded companies, and certain nonprofit organizations. The law also exempts any entity that (i) employs 20 or more full-time employees in the United States, (ii) had more than $5,000,000 in gross receipts or sales during the most recently completed tax year, and (iii) has a physical office in the United States.
Every company should review these exemptions to determine whether a filing is required. We expect that most small privately owned entities (i.e., below $5,000,000 in gross sales) 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 a company 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 (i) owns 25% or more of the equity interests of the entity, or (ii) 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”, which is the person responsible for filing its formation documents.
Once the beneficial owners are identified, the company must collect and report either (i) basic information about those individuals including name, date of birth, address, and driver’s license or passport information or (ii) the beneficial owner’s FinCEN identification number.
Because of the potential significant penalties for failure to comply with the CTA, discussed below, business owners should consider whether their existing shareholder agreements, operating agreements or other governance documents should be modified to require cooperation from individual beneficial owners whose personal information will be reportable.
When are reports required?
For reporting companies formed prior to January 1, 2024, the initial Beneficial Ownership Information Report (BOIR) is required to be filed prior to January 1, 2025.
For reporting companies formed on or after January 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 January 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, a division of the U.S. Treasury Department. The agency’s online portal can be accessed at www.fincen.gov/boi.
What are the penalties for failure to report?
The penalties for failing to comply with CTA beneficial ownership reporting can be significant. The law provides that any person that 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.
Connect with Robert T. Smith and Taylor A. Stockemer to ensure your business is prepared for the Corporate Transparency Act year-end deadline.