In an effort to combat money-laundering schemes, Congress recently passed the Corporate Transparency Act (CTA) with a veto-proof majority. As part of the 2021 National Defense Authorization Act, the CTA became law this month.
The CTA requires private companies, including anonymous real estate LLCs, to disclose their beneficial owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
Nearly two million corporations and limited liability companies (LLCs) are registered each year in the United States, and many investors use anonymous LLCs to purchase real estate. The question on many investors’ minds is whether their anonymous LLCs are still legal under the CTA.
The answer is yes, but the new law does adds to the complexities involved with setting up an anonymous LLC and maintaining compliance. In this article, we will explain what you need to know about the CTA.
While many investors use anonymous LLCs (which are limited liability companies with owners not publicly identified by the state), as a way to safeguard their assets from unnecessary lawsuits, others use them for shady dealings.
Drug cartels, sellers of counterfeit and pirated goods, human trafficking rings, and corrupt officials use anonymous corporate structures to move and hide their wealth. The new law is meant to make it more difficult for these criminals to evade taxes or anonymously launder money through “shell" companies.
Here’s how. The formation of an anonymous LLC has been governed on a state-by-state basis. Many states have collected very little information when these legal entities have formed. For example, states such as Delaware, New Mexico, and Wyoming did not require individuals to disclose their identity when creating an LLC. Some states have asked citizens applying for their driver’s license for more information than those forming an anonymous LLC.
The CTA closes this loophole by requiring the Treasury Department to collect the names of beneficial owners when the entity is formed. The Act defines a “beneficial owner” as a person who does one or more of the following:
Anyone registering a new company must now provide the name, address, and date of birth of the real owners, along with an identification number for each owner (such as a passport or driver’s license number). Although the information will not be available to the general public, banks will have access to the Treasury ownership database to verify data on new customer accounts.
Reporting requirements do not apply to publicly-traded companies, companies that already are subject to certain government regulations (banks and investment advisers), and larger companies with at least 20 full-time employees that reported at least $5 million in gross receipts on filed federal income tax returns. The Treasury has the authorization to create other exempt categories in the future.
Corporations and LLCs established before the law’s adoption must disclose and report their ownership information to the Treasury Department within two years. Monetary penalties and fines will be issued for non-compliance, and imprisonment is possible for false reporting or failure to file a report.
The goal of the CTA is to identify criminals and stop criminal activity. However, law-abiding investors can still use anonymous LLCs as a way to hide their identity when they purchase real estate. For instance, anonymity is one of the main benefits of establishing a Land Trust, and anonymity also extends to the transfer of beneficial interest in trust.
Anonymity has proven to be extremely effective in preventing unwarranted lawsuits that can be initiated by ethically questionable individuals.
The new legislation technically still provides a barrier of anonymity since the database of beneficial owners will not be available to the public. The law also allows for some exemptions from the disclosure requirements, such as domestic investment funds that are operated by registered investment advisers.
As a Royal Legal client, your anonymity is from public records searches since we are working on protecting information from attorney searches. We have never been anonymous from the IRS or other governmental entities. Since the data is accessible to banks, investigators, and the Treasury Department and not to litigants and attorneys, we can continue to guarantee your anonymity as long as there is no actual legal investigation.
We understand how important your anonymity is. After all, keeping your net worth from public records can help limit and reduce the likelihood of a lawsuit and aid in future negotiations you may have.
Some of the logistics of the CTA still have to be worked out. The professionals at Royal Legal will continue to keep you up to date on this legislation and how it may impact our clients in the future.
For more information, check out our article, How LLC Managers are Not Liable for LLC Fraud.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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