Get myCPE Unlimited Access @ $299 $199/Annually
The Corporate Transparency Act of 2022 has become the subject of discussion among several people, especially business owners, CPAs, and attorneys, who are mostly debating about the pros and cons of what it means for them and their clients. With FinCEN issuing final regulations for how businesses must comply the Corporate Transparency Act is touted to aim at guarding against money laundering and disrupting circumvention maneuvers, terrorism financing, and other forms of illicit financing.
This act is expected to build a pathway for FinCEN (Financial Crimes Enforcement Network) to develop a standardized reporting of companies being formed in the USA and their disclosure of beneficial ownership information.
We’ll explain in detail the corporate transparency act that requires those who own control or form most corporations and LLCs to report identifying information to FinCEN. Here’s what businesses must know before the rules take hold in 2024.
The act applies to all corporations, LLCs, partnerships, or other similar entities either created through a U.S. state filing or formed under the law of a foreign country and registered to do business in the U.S. Every owner of a U.S company needs to do it, including someone who sets up a U.S company on behalf of others (even attorneys too).
It requires them to report to FinCEN the identities of all company “beneficial owners” — the natural persons (human beings) holding at least 25% of the company’s equity interests or who otherwise have substantial control over the company.
Existing companies have from January 1, 2024, until January 1, 2025, to file the report with FinCEN. The companies formed on or after January 1, 2024, must file the report within 30 days of company formation.
If any of the information on the report was inaccurate when the report was filed the reporting company has to file a corrected report within 30 calendar days after becoming aware of the inaccuracy.
If a company owns another company the human being that owns the former needs to be reported. It also requires that a beneficial owner must be a natural person/human being.
Official owners do not include minor children nominees and the like a mere employee one who inherited the company or a creditor of a company unless that creditor is also a beneficial owner.
Prior to this updated ruling you just needed to provide a number from the document, however, now you need to provide an image of a document. No financial information or details about the business purpose or operation is required.
If you're an applicant such as an attorney setting up a company and you're not a beneficial owner of the entity you not only need to report all of the beneficial owners you also need to provide the same information on yourself the applicant.
There are incredible tax and lawsuit protection benefits for operating your business in a corporation or LLC. Yet, not many people who form companies in the US might be happy about this, even though it is well-meaning, but it places an unnecessary additional ongoing layer of paperwork on the owners of every company in America.
Let's say you have 2,000,000 companies and 2,000 of them are false. Therefore, 99.9 percent of the genuine ones will have this extra burden. For just 0.1% of the fraudulent companies, they may possibly simply lie about who owns the company and then have these little side contracts about who receives the benefits to which they're supposed to report.
When filing taxes, there is already a report of the ownership of the company anyway.
Some also say that this additional reporting requirement has been brought simply because of the governmental database’s inefficiency.
Moreover, there are potentially easy and obvious ways around it. First of all, this only applies to US companies, and not to Offshore ones. So, one can simply operate using an offshore company. However, if an offshore company is to do business in the US, it has to be reported to FinCEN.
Plus, there are certain kinds of trusts such as on-staff attorneys set up or own real estate and other assets that a corporation or LLC can own where one can maintain the privacy of ownership. In simpler words, imagine a land trust can own the real estate but an LLC can own the land trust.
But putting people’s opinions aside, it is the law and we're all subject to it and need to comply.
In justification for this Act, Democrat Congresswoman Carol B Maloney's sponsorship of this bill is that she says nearly 2 million corporations and LLCs are formed in the U.S every year. Very few states require information about who owns them.
While in order to set up an offshore company the foreign regulations require that we need a reference letter from the person's Banker a reference letter from a CPA or attorney the company purpose the source of funds a notarized copy of a utility bill or other residential address verification and notarized copy of a passport
However, to set up a U.S company we just need the name of the first director, and for an LLC that can be another company as its manager. Often criminals launder money through these companies to buy buildings and other assets and law enforcement agencies may not always find who owns them.
Is this an invasion of privacy? That is something a number of people would ask. However, not even a bank can get this information without your consent. There are only three ways to get your beneficial ownership information that's been reported to FinCEN:
Just like someone files taxes every year, this information too must be filed once annually.
The law also outlaws Bearer Shares, the stock certificates made out to the bearer that is whoever holds the stock certificate owns it.
That is something you used to offer to clients back in the early 90s when you may have started but they are outlawed now.
You may be subjected to penalties if:
In case it happens due to a reasonable cause and not willful negligence, your penalty may be waived with the permission of the secretary of the treasury.
Also, the penalty for the misuse or unauthorized disclosure of beneficial ownership information has a provision of criminal penalties under 5322 shall apply i.e. disclosing the owner of a U.S. corporation or LLC Title 31 of U.S code section 5322 says you can be fined up to $250,000 or imprisoned for not more than five years or both.
Even someone sniffing around who's trying to sue you or actually does Sue you in Civil Court cannot access it. Only agencies such as law enforcement doing investigations can access them on a need-to-know basis.
For privacy, it clearly states that you can have a nominee such as a nominee officer or director in the public records so your name doesn't show up for somebody who might be sniffing around for your assets. So FinCEN will know who the owners are but that big ugly guy who wants to sue you may not now benefit.
This law does not apply to Offshore corporations or LLCs unless they do business in the U.S. and this lot does not apply to exempt companies the full reporting requirement also does not apply to publicly traded companies financial institutions such as Banks or exempt non-profits such as churches.
Categorical exemptions are established for certain entities including banks or bank holding companies; federal or state credit unions; government entities; entities having publicly traded securities or that are otherwise registered with regular reporting requirements to FinCEN, the Financial Industry Regulatory Authority (FINRA) or the Securities & Exchange Commission; insurance companies; public accounting firms; public utilities; 501(c) recognized tax-exempt entities; and tax-exempt political organizations.
Qualified reporting exemptions are established for large operating companies, which must have a physical office in the U.S., more than 20 U.S.-based full-time employees, and more than $5 million in gross receipts or sales in the U.S. as reported on prior year federal income tax returns.
Hope this has been a good read and worth your time, however, we have a highly insightful webinar upcoming on myCPE titled: Corporate Transparency Act: What You Need to Know which will help you learn even better about this act. This webinar is especially beneficial for CPAs who would advise their clients on this latest business law. Click here to register now.
Check out our businesslaw cpe courses today!
Imtiaz Munshi, CPA 
