Businesses with more complex structures, like corporations, are technically their own legal entities. The federal courts have repeatedly ruled that businesses largely have the same rights and protections as individuals. However, businesses do not exist independently of the people who create and manage them. Every corporation, limited liability company (LLC) and other business relies on the decisions of those in ownership or leadership positions.
One person can potentially invest in and manage multiple different businesses. Some people intentionally develop relationships with multiple organizations and conduct questionable financial transactions. Difficulty tracking relationships between individuals and businesses is one of the reasons that federal lawmakers recently passed the Corporate Transparency Act (CTA).
What does the CTA require?
The CTA was a bipartisan law passed in 2021 to counter financial crimes and reduce funding for terrorism. The CTA technically went into effect at the beginning of 2024 and creates new reporting obligations for businesses operating within the United States.
The CTA mandates reports from businesses that identify those who helped start the company or have an ownership interest in it. Specifically, businesses with opaque ownership structures, including corporations and LLCs, have to file a report with the Financial Crimes Enforcement Network (FinCEN). Organizations must identify anyone with a beneficial ownership interest (BOI). They must provide identifying information about any party who holds a 25% interest in the company or more.
Organizations also have to identify the parties who filed paperwork with the state to form the organization. The law even requires the identification of those who guided or managed the actions of those who filed that paperwork. If someone instructed their personal assistant to form an LLC, the person who provided instructions as well as the assistant must have their names included in the report submitted to FinCEN.
Existing businesses have more time to comply with the CTA than new businesses. Companies already operating when the CTA took effect as of January 1st, 2024 have until the beginning of 2025 to submit the necessary report to FinCEN. New businesses formed after the beginning of 2024 typically must file their BOI report during the business formation process. A failure to file the report could lead to financial penalties and may trigger an investigation that could lead to prosecution in some cases.
Companies that already exist and those starting businesses must be cautious to ensure that they comply with the CTA and other key federal regulations. This is just one example of why learning more about changing federal business laws, and seeking legal guidance as necessary, may benefit those who have an interest in an existing business or who intend to start a company.
