Enacted in 2021, the Corporate Transparency Act (CTA) was established to bolster transparency in entity structures and ownership, aiming to counter money laundering, tax fraud, and other unlawful activities. The legislation seeks to gather additional information about the ownership of specific entities engaging with or operating in the U.S. market.
Initially, the Corporate Transparency Act was somewhat overlooked by accounting professionals. However, with the impending effective date set for January 1, 2024, there is a growing sense of urgency and concern.
As this date approaches, companies are increasingly seeking information on how the Corporate Transparency Act impacts their operations and the specifics of the reporting requirements. This situation creates a distinctive opportunity for accounting firms and tax professionals to expand their service offerings and potentially boost their revenue streams.
Entities required to file under the Corporate Transparency Act are classified as either domestic reporting companies or foreign reporting companies:
- Domestic Reporting Companies:
- These include corporations, Limited Liability Partnerships (LLPs), or any other entities that come into existence by filing a document with a secretary of state or a similar office under the laws of a state or Indian tribe.
- In essence, any entity formed within the United States falls under the category of domestic reporting companies.
- Foreign Reporting Companies:
- This category comprises corporations, Limited Liability Companies (LLCs), or other entities formed under the laws of a foreign country.
- To be classified as a foreign reporting company, the entity must be registered to conduct business in any state or tribal jurisdiction by filing the necessary documents with a secretary of state or a similar office.
- It’s important to note that sole proprietorships not utilizing a single-member LLC structure are not considered reporting companies under the Corporate Transparency Act.
Reporting companies subject to the Corporate Transparency Act encompass a variety of entities, such as:
- Limited Liability Partnerships (LLPs):
- Entities formed as partnerships that provide limited liability to certain partners.
- Limited Liability Limited Partnerships:
- Partnerships that combine features of limited partnerships and limited liability partnerships.
- Business Trusts:
- Legal entities established for the purpose of business or investment, often involving a trustee managing assets for beneficiaries.
- Most Limited Partnerships:
- Especially those where entities are typically established through filings with a secretary of state or a similar office.
It’s important to note that there are exemptions under the Corporate Transparency Act. Entities falling into these exemptions are not required to report Beneficial Ownership Information. Exempt entities may include:
- Securities issuers
- Domestic governmental authorities
- Banks
- Entities falling outside the categories mentioned above or specified in the legislation.
Exemptions are designed to exclude certain entities that do not align with the reporting criteria outlined in the Corporate Transparency Act.
Beneficial owners, as defined by the Corporate Transparency Act, can be classified into two distinct categories. A beneficial owner is any individual who, either directly or indirectly:
- Exercises Substantial Control:
- This refers to an individual who holds significant influence over a reporting company.
- Owns or Controls at Least 25% Ownership Interests:
- An individual who possesses or controls a minimum of 25% of the ownership interests in a reporting company.
The inclusion of these two categories is intended to eliminate potential loopholes and ensure comprehensive identification of all owners. The crucial distinction lies in the fact that beneficial ownership pertains to individuals with ownership interests represented through both capital and profit interests in the company.
Beneficial owners are obligated to report specific details to the Financial Crimes Enforcement Network (FinCEN). The required information includes their name, date of birth, address, and a unique identifier number from a recognized issuing jurisdiction, along with a photograph of the relevant document. If an individual chooses to submit their information directly to FinCEN, they may be issued a “FinCEN identifier,” which can be presented on a Beneficial Ownership Information (BOI) report in lieu of the mandated information.
Under the Corporate Transparency Act, company applicants are limited to specific individuals who play a direct role in the creation or initial registration of an entity to conduct business in the United States. A company applicant can be:
- The Individual Filing the Document:
- This refers to the person who directly submits the document that establishes the entity.
- The Individual Primarily Responsible for Directing or Controlling the Filing:
- This includes individuals who have the primary responsibility for overseeing or directing the submission of the relevant document, even if they are not the ones physically filing it.
It’s worth noting that while advisory services from accounting professionals may involve guiding clients through the process, the Corporate Transparency Act does not mandate the inclusion of information about the company applicant in the report. This aspect is essential for defining the scope of engagement when providing advisory services, ensuring that the focus remains on the specific reporting requirements related to beneficial ownership information rather than details about the company applicant.
When do reports need to be filed for the Corporate Transparency Act?
The Corporate Transparency Act is set to take effect on January 1, 2024. Reporting companies that are already in existence as of the effective date are required to submit their initial reports within one year.
For reporting companies created after the effective date, the initial filing deadline is 30 days after receiving notice of their creation or registration. It’s important to note that FinCEN has proposed extending the initial filing deadline for Beneficial Ownership Information (BOI) reports from 30 to 90 days specifically for entities created or registered in 2024.
Additionally, reports must be updated within 30 days of any changes to the beneficial ownership structure. This includes events such as the sale of a business, mergers, acquisitions, deaths of beneficial owners, or instances where the reporting company becomes aware of or has reason to know of inaccurate information previously filed. Keeping the BOI reports up-to-date with any changes is crucial for compliance with the Corporate Transparency Act.
The Corporate Transparency Act’s focus on anti-money laundering initiatives and financial accountability creates a significant impact on tax and accounting professionals. Companies are likely to seek assistance from their accounting professionals due to the Act’s implications, presenting an opportunity for these professionals to expand their advisory services.
The Act necessitates a heightened level of due diligence and risk assessment activities to ensure that company records are current both within the accounting firm and in the Financial Crimes Enforcement Network (FinCEN) database. Given the substantial penalties and the potential for imprisonment associated with non-compliance, careful monitoring of this area is crucial. Penalties for non-compliance can range from $500 to $10,000 per violation, with the possibility of imprisonment for up to two years.
Staying compliant also requires ongoing monitoring for changes and updates to the Corporate Transparency Act. Keeping abreast of such developments, along with staying informed about other local, state, and federal changes, is facilitated through the use of accounting and tax research tools, such as Thomson Reuters Checkpoint Edge®. These tools can aid professionals in staying well-informed and ensuring that their clients remain in compliance with evolving regulations.
Preparing for the implementation of the Corporate Transparency Act involves several key steps for accounting professionals to ensure compliance and provide effective advisory services. Here are some recommended actions:
- Proactive Approach:
- Accounting professionals should adopt a proactive stance by staying informed about the Corporate Transparency Act and related regulations. This proactive approach enables them to respond quickly to client inquiries and concerns.
- Client Outreach:
- Reach out to clients to assess their readiness for the January 1, 2024 deadline. Inquiring about their preparedness and offering guidance on compliance will be crucial in helping clients navigate the new requirements.
- Define Advisory Service Scope:
- Clearly define the scope of engagement for advisory services related to the Corporate Transparency Act. This involves communicating the specific areas where accounting professionals can provide assistance and support.
- Prepare a Checklist:
- Develop a comprehensive checklist outlining the necessary steps for compliance with the Corporate Transparency Act. This checklist can serve as a guide for both accounting professionals and their clients, ensuring that all relevant requirements are addressed.
- Implement Organizing System:
- Establish an effective organizing system to manage and maintain the required documentation and information related to the Corporate Transparency Act. An organized system will contribute to efficient record-keeping and facilitate compliance.
- Client Education and Relationship Building:
- Taking a proactive approach to educate clients about the Corporate Transparency Act and related advisory services can strengthen client relationships. Providing clear and transparent communication will build trust and help clients feel supported in navigating these regulatory changes.
By proactively addressing these areas, accounting professionals can position themselves as valuable partners to their clients, offering guidance and support to ensure compliance with the Corporate Transparency Act.
Embracing the Corporate Transparency Act as an accounting professional involves recognizing the additional compliance responsibilities it brings to the spectrum of services offered. Traditionally covering areas such as financial reporting, tax compliance, mergers and acquisitions, and internal controls, accounting professionals must now include compliance with Beneficial Ownership Information reporting in their purview.
Investing in high-quality research tools, such as Checkpoint Edge, is essential to prepare for this transition. These tools provide up-to-date information, empowering accounting professionals with the knowledge needed to navigate the complexities of the Corporate Transparency Act.
Given that the Act primarily targets small businesses, many of which fall under the category of non-employer firms, there is a unique opportunity to deliver added value. Accounting professionals can extend their services by offering advisory support and taking on the administrative aspects of reporting and compliance monitoring. By alleviating the administrative burden for small businesses, accounting professionals can package these services into a comprehensive advisory offering, reinforcing their role as valuable partners in navigating regulatory changes. This approach not only ensures compliance but also enhances the overall support provided to clients.
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