January 31, 2024

The Corporate Transparency Act: What North Carolina Law Firms Need to Know About Protecting the Law Firm as a Business Entity and the Risk Associated with Undertaking Reporting Requirements on Behalf of Clients  

Lawyers Mutual has published previous alerts regarding the new filing requirements under the Corporate Transparency Act (“CTA”) that went into effect January 1, 2024. After reviewing additional resources, we want to emphasize concerns that we have about the risks and increased potential liability for lawyers undertaking the reporting requirements. This is especially true for the continuing reporting requirements after entity formation and initial reporting.

The CTA requires certain business entities to file information on their “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury. These entities are referred to as “reporting companies” and include most entities formed under state law, like LLCs, LLPs, and corporations. The CTA applies both to US entities and to foreign entities doing business in the United States. The CTA further requires reporting companies to file updated reports within thirty (30) days of any change in information previously reported by the reporting company. 

If you undertake the responsibility of filing the initial beneficial ownership information report on behalf of a client, you will be required to certify that the report is true, accurate, and complete. For each beneficial owner, you must provide the full legal name, date of birth, residential address, and ID number from a nonexpired passport, driver’s license, or state identification card. The willful failure by a Reporting Company, its senior officers, and/or a Beneficial Owner to comply with the CTA’s requirements and timely provide accurate information to FinCEN can result in both civil penalties (fine of $500 per day that a violation continues, up to a maximum of $10,000) and criminal prosecution (fine of up to $10,000 and/or imprisonment of up to 2 years).

Because of the substantial potential penalties and the logistics of collecting accurate beneficial owner information and staying current on ownership changes and any changes of address for beneficial owners, we do not recommend that firms undertake the initial filing of beneficial owner information or any update reports of changes to the beneficial owner information. We recommend that firms 1) notify all current clients about the new requirements of the CTA (with a disclaimer that the notice is not intended to form any attorney-client relationship with respect to advice about the filing requirements under the CTA); 2) limit the scope of their representation in their engagement agreements with business clients; and 3) notify all current clients that the firm will not be assuming responsibility for the initial filing requirements or any updates on behalf of clients. 

There are companies like CT Corporation that offer these services and are better equipped to handle this kind of work. If you have a simple family-owned business client where you do not expect ownership to change and you can trust that you know who the beneficial owners are and what the purpose of the business is, the reporting requirements risks would be substantially reduced. Otherwise, we recommend a limited scope engagement letter that clearly states that the lawyer will not serve as the applicant at formation and will not be responsible for undertaking the preparation and filing of FinCEN reports on behalf of clients and will not be responsible for updating FinCEN reports to reflect changes in beneficial ownership. 

Aside from client-related risk, law firms need to determine their own status as a reporting company under the CTA. Are law firms (sole practitioner or law firms of 2 or more attorneys) considered to be a “reporting company” under the Corporate Transparency Act (CTA) meaning the owner(s) of the law firm must be disclosed as beneficial owner(s) to FinCEN? The answer is yes IF the law firm was formed by submitting a corporation, LLP, or LLC business entity form to the NC Secretary of State’s Office.  FinCEN offers a Small Entity Compliance Guide and infographic to help business entities determine their status and explain certain exemptions.

Aside from advising business clients on the CTA, we highly encourage law firms to determine whether they meet the definition of a reporting company and submit a timely filing to comply with the CTA. Failure to comply with the CTA may result in criminal and civil penalties and create adverse consequences to client work that could lead to a malpractice claim. 

General Articles

Ethics Opinion (former clients)

CTA Service Providers

FinCEN Resources

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