Next year, on January 1 the beneficial ownership information (BOI) reporting requirement imposed by the Corporate Transparency Act (CTA) is scheduled to go into effect. The CTA requires statutorily-created business entities (other than those exempted) to file a BOI report providing personally identifiable information about the individuals who own or control the entity, among other information.
According to Congress, a beneficial ownership reporting requirement is necessary to help identify “malign actors” who are using business entities to launder money and commit other financial crimes in the United States. The report is filed with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and the information will be maintained in a private database, with access restricted mainly to federal law enforcement, state law enforcement (with a court order), and financial institutions (with the company’s consent) and can be accessed only for certain specific purposes. The final rule implementing the reporting requirement was issued by FinCEN on September 29, 2022.
Much has been written about the impact of the CTA on small businesses. However, the CTA will also have a significant impact on law firms. That impact may be felt in a number of ways including the following:
- Law firms may be reporting companies
- Lawyers, paralegals, or other staff may be considered company applicants
- Law firms may need to inform their clients of the CTA’s BOI reporting requirement
- Law firms should be prepared to advise their clients as to how they can comply with the beneficial ownership information reporting requirement
Law firms as domestic reporting companies
Beneficial ownership information reports are required to be filed by domestic and foreign (non-U.S.) reporting companies. Could a law firm be a reporting company?
The final reporting rule defines a domestic reporting company as an entity that is a corporation, LLC, or other entity created by the filing of a document with a Secretary of State or similar office under the laws of a state or Indian tribe. An entity that meets that definition would be required to file a BOI report unless it qualifies for one of the 23 exemptions listed in the final rule.
Those exemptions are mainly for entities that are already heavily regulated by the government, such as publicly-traded companies, financial institutions, insurance companies, public accounting firms, and tax-exempt entities.
Can law firms be exempt from BOI reporting?
There is no exemption for law firms, but there is an exemption for large operating companies. A large operating company is defined as an entity that employs more than 20 full-time employees in the United States, has an operating presence at a physical office within the United States, and filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales.
A law firm that is a reporting company would be required to file an initial beneficial ownership information report on or after January 1, 2024, and on or before January 1, 2025. BOI reports must contain certain current information about the reporting company (legal name, DBA names, business address, state of formation, and Taxpayer Identification Number) and about all of its beneficial owners (name, date of birth, residential address, unique number from an acceptable document such as a U.S. passport, state ID, or driver’s license, and an image of that document).
What is a beneficial owner?
A beneficial owner is defined as any individual who directly or indirectly either exercises substantial control over a reporting company or owns or controls at least 25 percent of the ownership interests.
Updated reports will have to be filed within 30 calendar days of any change in the information reported.
Law firms and company applicants
Domestic reporting companies created on or after January 1, 2024, and entities that became foreign reporting companies by registering to do business in a state on or after January 1, 2024, in addition to providing information about the company and beneficial owners, will have to provide personally identifiable information about their company applicant or applicants.
Could a lawyer, paralegal, or other law firm employee be a company applicant?
This is a question that law firms involved in creating domestic entities or registering foreign entities will need to consider.
A company applicant is defined as the individual who directly files the document that creates the domestic reporting company or who directly files the document that first registers the foreign reporting company and for a domestic or a foreign reporting company, the individual who is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the document. The information about company applicants that must be reported is the same as the information reported about beneficial owners with one exception — a company applicant who forms or registers an entity in the course of the company applicant’s business must set forth his or her business address rather than a residential address.
Law firms notifying clients about the Corporate Transparency Act
An important question for law firms that have assisted clients in forming or registering business entities in the past is whether they are obligated to notify those clients about the Corporate Transparency Act and the beneficial ownership information reporting obligation that goes into effect on January 1, 2024.
In addition, law firms assisting in the formation of new business entities or the registration of foreign business entities on or after January 1, 2024, may wish to determine their obligation to inform those clients of the CTA’s BOI reporting requirement. (Newly formed or registered reporting companies must file their initial report within 30 calendar days of receiving notice of their creation or registration.)
Law firms may wish to check their local ethics rules to determine their obligations. However, even if they are not obligated, law firms may choose to inform their clients of the CTA’s BOI reporting requirement.
Law firms providing legal advice to reporting company clients
Law firms with business entity clients should be prepared for these clients seeking their legal advice in order to comply with the Corporate Transparency Act’s beneficial ownership information reporting requirement.
They may be asked, for example, to advise a client as to whether it is required to file a BOI report and to help the client fill in the required information. Clients may also need help determining who their beneficial owners are. They may also ask when and where they file their report and what to do when the information changes.
In order to provide advice, it is important for the lawyers in these law firms to familiarize themselves with the Corporate Transparency Act, FinCEN’s final reporting rule, the next two rules FinCEN is required by the CTA to issue, and with any further guidance provided by FinCEN.
Resources from CT Corporation
CT Corporation has been monitoring all of these developments and has created content regarding the BOI reporting requirement that law firms may find helpful.
We have an article on the reporting rule that can be accessed here: FinCEN issues final rule implementing the reporting requirements of the Corporate Transparency Act. This article has a link to the final rule.
We presented a webinar on BOI reporting under the CTA that may be accessed here: Beneficial ownership information reporting under the Corporate Transparency Act.
There is also a podcast discussing the final FinCEN ruling: CT expert insights: Understanding the Corporate Transparency Act (CTA) reporting requirements.