The business formation process usually involves multiple complex stages. Aspiring small business owners have to choose a specific business structure, learn about relevant regulations, acquire licensing, purchase insurance, find facilities for business operations, hire workers and take a host of other steps to establish a functional organization.
Regulatory compliance is a crucial element of running a successful business. Entrepreneurs need to understand relevant state and federal laws that apply to their industry, as well as tax and employment laws. They may also need to comply with laws that govern the type of business they form.
Since January 1st, 2024, a new federal law might apply to certain business startups. Specifically, those starting limited liability companies (LLCs) or other businesses with opaque structures where ownership is not obvious may need to file a special document with the Financial Crimes Enforcement Network (FinCEN) or risk fines and possibly federal prosecution.
Businesses must follow the Corporate Transparency Act
Lawmakers adopted the Corporate Transparency Act (CTA) as a way of limiting money laundering and funding for illegal activities. The CTA helps connect specific investors and executives with the various businesses they fund or help form.
The CTA requires that those operating businesses with opaque structures report the names and relevant identifying information of those who helped create those companies and those who have a beneficial ownership interest (BOI) in the organization. The company must identify anyone who has a 25% or greater ownership stake.
Even small businesses with one owner are subject to this rule depending on the type of business entity established. Businesses that were already operating at the time the CTA took effect have through the end of 2024 to file their BOI report with FinCEN. However, new startups have to file the report within 30 days of their formation to comply with the law. Failure to do so can lead to up to $500 per day in fines and the possibility of prosecution.
Learning more about the requirements imposed during the business formation process can help business owners avoid costly compliance issues. The CTA is one of numerous laws that many entrepreneurs must navigate in order to ensure compliance and avoid financial and legal complications.