There are many different types of business structures that people can form when starting a new company. Those aiming for speed and simplicity might choose a sole proprietorship, while those worried about liability might select a more complex business form.
Limited liability companies (LLCs) are a popular option in part because they provide a degree of separation between the person starting the company and the organization. Should the business fail or face litigation, the sole member who started the LLC typically has a degree of protection from personal liability.
However, they are subject to certain rules and regulations that apply to more complex business structures. For example, they may need to file paperwork with a federal regulatory agency to comply with a new federal law. The Corporate Transparency Act (CTA) took effect as of January 1st, 2024, and it imposes an obligation on many people starting an LLC or similar business.
What does the CTA require?
Lawmakers enacted the CTA as a way of connecting individual investors and entrepreneurs to businesses with opaque structures. LLCs are among the various types of organizations that have to file paperwork with the Financial Crimes Enforcement Network (FinCEN).
The CTA requires that companies file a beneficial ownership interest (BOI) report. Businesses that already existed when the CTA took effect have until January 1st to file the BOI report with FinCEN. New startups have to handle the matter more quickly. They have to file the BOI report within 30 days of formation to remain compliant with the law.
What are the penalties for non-compliance?
The risk of failing to file a BOI report is significant. FinCEN can impose civil penalties that can be as high as $500 per day the business remains non-compliant. Those in positions of authority within non-compliant organizations are also at risk of criminal prosecution. They face jail time and substantial fines imposed in addition to any civil penalties assessed. With that said, some businesses, including larger organizations and members of the National Small Business Association, may be exempt from BOI reporting requirements.
Ensuring compliance with state and federal regulations is crucial for the protection of those starting small businesses. The CTA is one of many regulations that can cause financial and legal issues if business owners are not aware of their regulatory obligations.