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Should entrepreneurs worry about the Corporate Transparency Act?

On Behalf of | Mar 22, 2024 | Business Law

Starting a new business means taking a lot of risk. People can’t know for sure how the market might respond to a new business endeavor, and rapid changes might render a once-viable concept unprofitable in a matter of weeks, months or years.

Entrepreneurs not only need to have a firm grasp of market conditions, but they also need to very carefully comply with all applicable state and federal laws to better ensure the success of their endeavors. Constant changes to legal expectations for businesses create the possibility of compliance issues that could lead to fines, public relations concerns or even prosecution in some cases.

The Corporate Transparency Act (CTA) is a new business law that applies to corporations and several other types of businesses. Do entrepreneurs starting new companies need to worry about the CTA?

Some entrepreneurs may need to file a report

The CTA requires that businesses file reports identifying investors and parties involved in creating the company. Sole proprietorships and similar transparent business structures are not subject to the CTA, as anyone can readily tell who has an interest in the company.

However, businesses that have unclear ownership, including limited liability companies (LLCs) and corporations, do need to file a report. Organizations must disclose the identities of individuals with a 25% or higher investment stake in the company. Existing companies have until the beginning of 2025 to submit their beneficial ownership interest (BOI) reports to the Financial Crimes Enforcement Network (FinCEN).

New companies started after the beginning of 2024 must file the report as part of the startup process. The CTA could potentially help connect seemingly unrelated companies to prevent money laundering and other financial misconduct.

Non-compliance could lead to sizable fines of up to $10,000 or possibly criminal prosecution. Some companies have already begun complying with the BOI reporting requirements, although pending legal action could influence the future of the CTA. Additional litigation and court review are likely necessary to determine if the CTA is an enforceable federal statute. Companies that wait until the resolution of those conflicts to act could become unintentionally non-compliant if the case drags on for months.

It is all but impossible for business owners and executives to run a company while simultaneously tracking legal compliance concerns with the level of detail required to stay safe. Consulting with a skilled legal team about applicable laws can help those starting or operating businesses avoid violations of state and federal business statutes, accordingly.

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