Corporate Transparency Act Compliance: What California Law Firms Should Know as Deadline Looms 

Corporate Transparency Act Compliance: What California Law Firms Should Know as Deadline Looms 

Estimated reading time: 6 minutes

A federal law requiring millions of businesses to disclose new information is approaching its first deadline. Amid lingering uncertainty over exemptions and definitions of beneficial ownership, California law firms still have much to unpack to help their clients navigate this new compliance burden.  

As the name implies, the Corporate Transparency Act (CTA) mandates that private corporations and limited liability partnerships registered to do business in the U.S. must reveal who owns and controls them. Using this information, the Financial Crimes Enforcement Network (FinCEN) seeks to make it harder for criminals to conceal or benefit from ill-gotten gains via shell companies or other opaque ownership structures. As a bureau of the Department of the Treasury, FinCEN aims to safeguard the financial system by detecting and preventing money laundering, terrorist financing, serious tax fraud and other crimes.  

After taking effect this year, the first deadline for filing reports with FinCEN is Jan. 1, 2025. This does not apply to companies that were formed this year, which had a shorter turnaround of 90 days, nor will it apply to companies formed from 2025 onwards, which will need to comply within 30 days. 

The arrival of the CTA heralds a new era for most private businesses — including law firms — which have historically not provided such information, so the new requirements could catch some off guard. Notably, beneficial owners can include general counsel, who are considered a senior officer of the company. Thus it’s both a new compliance issue for law firms and added responsibility for them to properly advise clients subject to the new regulation.  

Here’s what to know.  

The reporting requirements are strict 

By Jan. 1, 2025, companies subject to the CTA must file a report on FinCEN’s website identifying their beneficial owners.  

Companies registered to do business before Jan. 1, 2024, must disclose the full names, home addresses and official identification documents of those who own and control the company. Up to two “company applicants” who were involved in creating the company should also be listed in the report. Likewise, the employee, owner or third-party provider handling the filing must share basic contact information, including their name and email address or phone number. 

Those required to report include corporations, limited liability companies and other entities that were created by filing a document with a secretary of state or similar U.S. office, along with entities formed under the law of a foreign country that are registered to do business in the U.S. This also applies to companies formed in a U.S. territory.  

There is no fee for submitting. Changes to the entity’s ownership or other reported information must be updated within 30 calendar days. 

The definition of a beneficial owner is nuanced 

In theory, beneficial ownership broadly refers to the individuals who own or control the company. Accurately identifying those with substantial influence or control, however, involves a detailed examination of various factors and relationships. 

According to FinCEN, a beneficial owner either directly or indirectly owns or controls at least 25% of the company’s ownership interests or exercises substantial control over the company. Trusts, corporations or other legal entities cannot be considered beneficial owners, but information about an entity can, in special circumstances, be reported instead. 

Calculating who owns 25% of the company might be straightforward, but deciphering who exerts substantial control is where many businesses are encountering challenges. Individuals who exercise substantial control over a company can do so in four ways: 

• Serving as a senior officer, such as the president, CFO, general counsel, CEO, COO or a similar role. 

• Holding the authority to appoint or remove key officers or most of the company’s directors (or similar governing body). 

• Acting as a key decision-maker for the company. Important decisions can include those related to reporting the company’s business, finances and structure. 

• Exercising any other form of substantial control, as detailed in CEB’s CTA explainer.  

There are 23 exemptions 

More than 23 different types of entities don’t need to file the report with FinCEN, but be sure to review the criteria carefully before concluding that your client or firm is exempt.  

Some companies are already subject to similar regulations and disclosure requirements, making the CTA redundant. These include public companies, banks, credit unions, insurance companies, venture capital advisers and tax-exempt entities. Statutory trusts, business trusts, foundations or other domestic entities are exempt if they were not established by filing a document with a secretary of state or similar authority. Some companies with more than 20 full-time employees, a physical presence in the U.S. and gross revenue over $5 million are exempt. 

Small businesses and most law firms are not exempt — nor are nonprofits without a tax exemption from the IRS, or newly formed entities without prior-year federal tax filings. 

The information can be accessed by other government agencies 

FinCEN will store the information disclosed in your report in a private database but will grant access to federal state, local and tribal officials, along with some foreign authorities for reasons related to national security, intelligence and law enforcement. Some financial institutions will be able to access the information, too, with the reporting company’s consent — as will regulators supervising those institutions. 

Penalties for noncompliance are steep 

Failure to report or false reporting can result in serious repercussions and fines. For every day the violation continues, FinCEN will apply a civil penalty of up to $500. Continued, willful noncompliance can trigger a $10,000 fine and up to two years of imprisonment. 

The CTA is a law firm issue, too! 

If only it was enough to simply not be a money launderer, but alas, bad actors tend to complicate matters for everyone else.  

While the CTA’s strict reporting requirements and looming deadline add to the already unforgiving burden of paperwork, they also present an opportunity for California law firms to support their clients as they navigate a new and evolving compliance issue. And as the CTA applies to most law firms, it’s equally important to lead by example in meeting these requirements. 

For more insights into federal reporting obligations under the CTA and to leverage CEB’s compliance insights, get in touch to schedule a free demo.