Government

Small Law Firms And Small Businesses May Have To Disclose Owner Information To The Federal Government Starting In 2024

While the reporting process is fairly straightforward, some businesses owners may complain about privacy and government overreach.

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tax lawIn the mid-2010s, the real estate market was recovering from the massive crash in 2008. But some of the buyers of U.S. real estate were not people planning to live there. Instead, they were corporations and limited liability companies (LLCs). While some states require public disclosure of the company’s officers and directors, these people may be doing the bidding of someone else. There were reports that these companies could be secretly run by people who are subject to government investigations around the world. These investigations included money laundering, tax evasion, financing of terrorist organizations, and even kleptocracy.

As a result, the Corporate Transparency Act (CTA) was passed in 2021, required the disclosure of identifying information of the people operating certain U.S.-based business entities, even those running them from behind the scenes. A key reporting requirement coming next year will inadvertently affect many small businesses, including law firms.

Below are the general reporting requirements under the CTA and some observations.

Starting in 2024, companies deemed to be “reporting companies” will be required to submit a Beneficial Ownership Information (BOI) report with identification information to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Who must comply? A domestic reporting company is a company that is created by the filing of a document with a state’s secretary of state or similar office under the law of the state or Indian tribe. This would include corporations, limited liability companies, and limited liability partnerships. For foreign reporting companies, it must be registered to do business in any U.S. state or tribal jurisdiction by filing a document with its secretary of state or similar office.

Deadline. If the reporting company existed prior to 2024, it has until January 1, 2025, to file a BOI. If a company is established on or after 2024, it has to file a BOI within 30 days of its registration.

Exemptions. Twenty-three specific types of entities are exempted from the BOI reporting requirements. Law firms are not one of them. However, a law firm could be exempted if it qualifies as a “large operating company.”

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A company qualifies as a large operating company if it meets all of the requirements below:

  1. Employs more than 20 employees working in the U.S. for more than 30 hours per week.
  2. The company has an operating presence at a physical office in the United States.
  3. The company reports more than $5 million in gross income in its federal income tax returns.

What is a “Beneficial Owner”? A “Beneficial Owner” is any individual who directly or indirectly exercises “substantial control” over a reporting company. The meaning of “substantial control” includes one of the following criteria:

  1. Is a senior officer of the company such as the president, chief executive officer, chief operating officer, chief financial officer, general counsel, or any other officer that exercises similar functions.
  2. Has the authority to appoint or remove any senior officer or a majority of the board of directors.
  3. Can direct, determine, or have substantial influence over important decisions made by the reporting company such as making major business decisions, major financial decisions, or major decisions regarding the structure or governance of the company.
  4. Any other form of substantial control over the reporting company.

A Beneficial Owner is also an individual who owns or controls at least 25% of the ownership interests of a reporting company. This includes equity, stock or voting rights, a capital or profit interest, convertible instruments, option contracts, and any other instrument used to establish ownership. Minors, nominees, custodians, agents, employees, inheritors, and creditors of the company may not be deemed a Beneficial Owner.

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Disclosure of other parties. If a company is created on or after January 1, 2024, then the reporting company must also report the company applicants. Company applicants are individuals who prepared and filed the documents that created the reporting company. Thus, if an attorney helped create the documents, then the attorney must also be reported. There must be at least one company applicant and no more than two.

Information required. The reporting company must provide the following identification information:

  1. Full legal name.
  2. Any trade name, including DBAs.
  3. Complete current U.S. address.
  4. State, tribal, or foreign jurisdiction of formation.
  5. IRS employer identification number (EIN). For foreign companies, a similar tax identification number and the name of the jurisdiction that issued it.

Every beneficial owner and company applicant must provide the following identification information:

  1. Full legal name.
  2. Date of birth.
  3. Complete current residential street address.
  4. The person’s identification number and issuing jurisdiction, along with a photo ID (a passport, driver’s license or identification card issued by a state, local government or tribe).

Failure to comply with the reporting requirements could result in civil and criminal penalties.

Observations. The peculiarly long reporting deadline for existing companies seems to give questionable entities time to either dissolve, become inactive and become exempt, liquidate assets, or change their business operating structure so that certain individuals do not meet the definition of “Beneficial Owner.”

But the reporting requirement will mainly affect many small businesses operating legitimately using the corporate or LLC form. While the reporting process is fairly straightforward, some businesses owners may complain about privacy and government overreach. They may also be wary about buying real estate through their entities.

Those who are contemplating starting a corporation or LLC should do it as soon as possible to ensure that the entity will be registered before the January 1 deadline and avoid the 30-day reporting deadline.

Attorneys who counsel small businesses can use this opportunity to provide an additional compliance service to clients. To minimize disclosure of personal information, attorneys should get a FinCEN identifier number which can be used in place of personal information. On the other hand, certain attorneys may opt to outsource this to someone else because of the risk of providing incorrect information.

More information about the BOI reporting requirements can be found at the FinCEN website.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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