In recent years, the U.S. real estate market saw an influx of corporate buyers, raising concerns about the potential involvement of individuals under government investigations for crimes such as money laundering and financing of terrorist organizations. To address this issue, the Corporate Transparency Act (CTA) was signed into law in 2021, mandating the disclosure of key identifying information of individuals operating certain U.S.-based business entities. However, the resulting reporting requirements of the CTA may inadvertently impact many small businesses, including law firms. Below, we explore the general reporting requirements and provide some insights.
Reporting Requirements:
Starting in 2024, companies deemed as “reporting companies” will be required to submit a Beneficial Ownership Information (BOI) report to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). A domestic reporting company includes corporations, limited liability companies, and limited liability partnerships created through the filing of a document with a state’s secretary of state or similar office. Foreign reporting companies must be registered to do business in any U.S. state or tribal jurisdiction.
Timeline and Exemptions:
Existing reporting companies have until January 1, 2025, to file a BOI report, while newly established companies must file within 30 days of registration. It’s essential to note that while exemptions exist for specific entity types, law firms are not among the exempted categories. However, a law firm could qualify as a “large operating company” to be exempt from the BOI reporting requirements. To qualify as a large operating company, the firm must employ more than 20 full-time U.S.-based employees, maintain a physical office in the United States, and report more than $5 million in gross income on federal tax returns.
Understanding Beneficial Ownership:
Under the CTA, a “Beneficial Owner” is any individual, whether direct or indirect, who exercises “substantial control” over a reporting company. The criteria for determining substantial control include being a senior officer of the company, having authority to appoint or remove senior officers or majority of the board of directors, making important decisions, or any other form of substantial influence over the company. Additionally, an individual who owns or controls at least 25% of the ownership interests of a reporting company is also considered a Beneficial Owner.
Disclosure Requirements and Compliance:
In addition to disclosing Beneficial Owners, reporting companies created on or after January 1, 2024, must also report the individuals who prepared and filed the documents that established the company, including attorneys. The required information includes full legal names, residential addresses, identification numbers, issuing jurisdictions, and relevant photo identification.
Consequences of Non-Compliance:
Failure to comply with the CTA’s reporting requirements can lead to civil and criminal penalties.
Implications and Recommendations:
While the extended reporting deadline for existing companies may raise eyebrows, providing questionable entities time to potentially avoid disclosure, the primary impact of the CTA will likely fall on small businesses operating legitimately. Business owners may express concerns about privacy and government overreach, particularly regarding real estate transactions through their entities.
To ensure compliance and minimize disclosure of personal information, attorneys counseling small businesses can assist by obtaining a FinCEN identifier number to be used in place of personal details. Alternatively, some attorneys may consider outsourcing this task to mitigate the risks associated with providing incorrect information.
The Corporate Transparency Act is a significant development aimed at promoting transparency and combating illicit activities in the business sector, particularly in real estate. As small businesses navigate the reporting requirements, seeking professional guidance, such as that provided by tax attorneys, can help ensure compliance. By staying vigilant and adapting to these new regulations, businesses can effectively address the broader goals of the CTA while protecting their interests.
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