The beginning of every year means employment law firms and practices need to bring their business clients up to speed on new rules and regulations.
One of this year’s new rules – the Corporate Transparency Act – focuses in on smaller businesses and the entities that entertainers often create. It mandates that those operations submit identifying information about their owners and beneficiaries. By disclosing full names, birthdates, addresses and other information, proponents said the appropriate federal agencies can better unmask bad actors behind money laundering and other illegal acts.
“What they’re trying to do is uncover dark money and just make sure people are complying with federal financial regulations,” explained Shaune Arnold, an affiliated counsel with Encino employment law firm Pearlman, Brown & Wax LLP.
Entity management is big business in Los Angeles, where the nature of the entertainment industry means that musicians, actors and other celebrities might have as many as a dozen or more business entities – that is, incorporated companies and other revenue-generating operations, with tax numbers – to cover all of their operations. For the financial professionals who work with those clients, any new regulation means a lot more work per client – and sometimes, that means going to a law firm.
“It’s just one more thing that we’ve got to follow,” said Amir Malek, a managing director at the Calabasas office of wealth and business management firm The Colony Group. “Most business managers like myself, we always look to see what is the most efficient way of doing work for our clients. Sometimes that means you farm it out to someone who has built the infrastructure to do this.”
Submitting info
Passed in 2021, the Corporate Transparency Act established a federal standard for business incorporation, one that requires business beneficiaries to file identifying information. While there are exceptions, broadly any incorporated business with 20 or fewer employees and annual revenue under $5 million must file this information. Larger operations typically already have to disclose this information in one form or another, while small businesses previously have not.
“If you have an LLC, who are your unit holders? If you have a corporation, who are your shareholders? If you have a limited partnership, who are your limited partners?” Arnold said. “Any entity that is registered with the secretary of state and that distributes shares or equity to investors are going to be impacted directly by this act.”
For all such officers, businesses need to file full legal names and corresponding birthdates, addresses and ID number from a driver’s license or passport to the Financial Crimes Enforcement Network, or FinCEN, an enforcement arm of the Treasury Department. Entities formed after Jan. 1 have 30 days to report this information, while those existing prior will have through the end of the year to file.
Citing similar provisions in other countries, proponents of the regulation claim it will help federal officials identify, track and shut down “dark money” and money-laundering operations, among other illegal activities.
“Big picture, I think it’s really an effort to try and get more oversight and control over money and equity in these types of businesses,” added Corinne Spencer, a partner at Pearlman, Brown & Wax.
Checking in on clients
The need to make sure clients know about this law has provided a good opportunity for professionals such as accountants and lawyers to really check in on certain aspects of their clients’ companies.
“It has given us an opportunity to have some real conversations about corporate governance with clients we may not have served in the past,” Arnold said.
The impetus behind the rule change is that the ease with which people can form a limited liability company paves way for obscure shell companies to launder money and otherwise disguise illegal activity by shielding who owners and beneficiaries are.
Treasury Secretary Janet Yellen, who described the regulation as key to revealing the owners of shell companies and combating “dirty money,” said more than 100,000 businesses filed their information during the first week of the year. FinCEN previously estimated the rule would affect more than 32 million entities.
Beyond getting the information and filing the documents, Arnold said this presents a good opportunity for lawyers such as herself to check in on other aspects of companies they represent and help them clean up their books.
“Some entrepreneurs who bring on investors don’t necessarily do things by the book,” she said. “They may have taken a check and said ‘you have X percentage of my company’ and then taken another check and another check and not really made it clear to their investors what their equity is. They also need to make sure their investors are not prohibited by the IRS.”
Malek, at The Colony Group, said he often directs his clients to a West Hollywood law firm – eMinutes – that has for decades specialized in entity formation and management and is prepared to take on CTA filings.
Jeff Unger, who has a background as a corporate and real estate attorney and formed eMinutes in 1997, said the work began when an entertainment lawyer asked if he could handle corporate minutes. That quickly spiraled into an idea to offer rote business management services, efficiently and at a bargain.
Growing firms
The firm has since grown to a team of 10 attorneys, plus support staff, based both in Southern California and in a New York office. The team keeps things brisk and efficient using software, often developed in-house by full-time computer scientists on staff. This software, for example, prepares automated first drafts of corporate minutes, which are then reviewed and edited by an attorney. Documents are prepared using HTML.
Unger said the firm had invested more than $5 million in technology and manages more than 48,000 businesses, at a starting rate of $155 per year. In California alone, eMinutes files nearly 15,000 statements of information to the state annually.
“Because we are responsible for tens of thousands of filings, we have developed fantastic custom-built tools to manage the data and filings,” he said. “When this new law was discussed, we immediately started looking at what tools we need to be able to apply the existing technology we have and leverage it to handle these new filings.”
Malek said eMinutes has been a great service to his clients, who will have separate businesses for, say, music tours and acting services.
“For a good portion of them, we usually have an infrastructure of an entity or multiple entities for touring and other aspects of their business,” he said. “There are multiple entities that they might have depending on the structure of their operations. Most of our clients have multiple entities that need to be maintained. If I had to come up with a number, I would say 90% have to (comply). I rarely have a client who does not have an entity.”