It is not often that new laws come into effect that change the ways lawyers practice law. However, the Corporate Transparency Act, 31 U.S.C. § 5336 (CTA) will impact not only new and existing entities represented by lawyers, but may impact the attorneys who form those entities as well.

In 2021, Congress passed the CTA to address the use of shell corporations and other entities that facilitate money laundering and other illicit activities. According to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), the CTA is intended “to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

Beginning Jan. 1, the CTA will require all “reporting companies” to disclose certain information known as beneficial ownership information (BOI) to the FinCEN.

The “beneficial owner” of a reporting company is defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the reporting company’s ownership interests.

An individual is understood to exercise “substantial control” when they serve as a senior officer, have authority over the appointment or removal of senior officers (or a majority of the board of directors, or similar body), or directs or has substantial influence over important decisions made by the company.

Indeed, the CTA recognizes that a person has “substantial control” over a company—either directly or indirectly (such as through a trust)—when they direct or influence decisions regarding the sale of assets, mergers, compensation schemes for senior officers, the entry into significant contracts, and other key business decisions.

Generally, the CTA applies to both foreign and domestic entities that are formed or registered to do business in the United States, including corporations and limited liability companies. Many of these requirements also apply to existing entities, although such filings will not have to be made before Jan. 1, 2025. The purpose of this law is to identify who ultimately owns and controls certain companies.

However, there are 23 enumerated exemptions, including, among others, for nonprofits, public companies, insurance companies, banks and large operating companies. While the CTA imposes these obligations on the entities themselves, lawyers who are engaged to advise clients on the formation of such entities would benefit from examining the exemption provisions and reporting requirements, including for company “applicants.”

Reporting Requirements

The CTA requires submission of BOI reports disclosing certain information about the reporting company (such as legal names, address, etc.) and its “beneficial owners” and “applicants.” These BOI reports will not be publicly available; however, failure to provide accurate information or to comply with the CTA may result in criminal and civil penalties.

Regarding timing, companies registered or formed before the CTA’s effective date of Jan. 1 have one year to file their initial BOI report. Companies registered or formed after the effective date have 90 days to do so.

“Beneficial owners” include owners or executives of the reporting company. “Applicants” include, among others, the person directly filing the formation or registration document of the reporting company. Lawyers, paralegals and other staff may be considered company “applicants” if they file formation or registration documents on behalf of their clients or otherwise meet the criteria set forth in the CTA.

Notably, law firms are not one of the 23 expressly exempted reporting entities, and thus may have compliance obligations of their own. Some of the other exemptions may apply to law firms, however, such as the exemption for “large operating companies” with more than 20 full-time employees, reporting more than $5 million in revenue from U.S. sources, and having an operating presence in the U.S.

Advising Clients

Beyond making clear to clients the scope of a lawyer’s role in connection with entity formation, lawyers and law firms may also consider whether to reach out to clients with regard to entities formed or registered prior to Jan. 1. If so, the law firm may decide to notify the client that they may be subject to CTA reporting requirements.

Although any new CTA reporting obligations would likely fall outside the scope of the client’s original engagement, the client may desire to enter into a new engagement for assistance with the new requirements. In the alternative, the client will be responsible for ensuring its own timely and accurate compliance with the CTA.

Other Strategies to Limit Exposure for Clients and Their Lawyers

Although there are no annual reporting requirements, after the initial filing, the reporting company must file an amendment of any change in reported information within 30 days of that change. As with many actions taken on behalf of clients, lawyers typically do not have an obligation to independently verify the information provided to them by a client, such as the information provided for in the BOI report.

However, lawyers can take steps to reduce exposure, by asking for additional information, if they are concerned that the information being reported by the client is inaccurate or incomplete.

Finally, law firms can assist their attorneys in ensuring CTA compliance, such as by offering information, guidance and training on key elements of the CTA, and creating new resources to assist with entity formation.

The CTA’s effective date is fast approaching. Thus, lawyers and law firms should prepare by considering not only the reporting obligations of their clients, but also whether they have any newly imposed obligations themselves. How the CTA will work in practice is yet to be seen, but lawyers can stay a step ahead by remaining vigilant of their client’s needs and the implications of the law on their own practices.