What Specific CTA Compliance Challenges Do Startups Face?

Mastering CTA Compliance: Essential Strategies for Startup Success

Over 30 million businesses are having to meet the new Corporate Transparency Act requirements as of January 1st, 2024. This act requires all companies that are registered in the US to report their beneficial ownership information to the Financial Crimes Enforcement Network. 

This mandate will affect all business types, but when it comes to startups, they will especially be affected. With severe penalties for not complying with the CTA, new startups must ensure that they complete their BOI reporting in order to be successful. 

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What Defines a Startup Company?

When it comes to determining what a startup company is, the answer is simple. A startup company is one that has a goal of developing roots and growing quickly. They do this by pursuing funds from investors or other such means of gaining an amount that will help them develop quickly. 

Does Your Startup Need to Comply With the Corporate Transparency Act?

Companies in the United States must report their beneficial owners with a few exceptions. These exceptions relate to financial companies, public works, and some others, but most companies in the United States do not fall into the exemption. 

Startups are generally registered as Delaware C-Corporations.  LLCs, S-Corps, C-Corps, and many other companies registered in the United States are considered reporting companies and must send in their BOI report. 

Consequences for Startups Not Complying With the Corporate Transparency Act

When starting a startup in 2024, it is essential to comply with the Corporate Transparency Act requirements as willfully failing to do so will incur hefty penalties. Non-compliance can result in civil penalties of up to $500 per day until the violation is remedied. It can also result in criminal penalties including:

  • Intentional or Willful Violations: If a startup willfully provides false or fraudulent beneficial ownership information or willfully fails to report complete or updated beneficial ownership information, they may face fines of up to $10,000 and imprisonment for up to 2 years. 
  • Negligence: Even unintentional non-compliance can result in fines and other penalties, though criminal charges are less likely. 

There are several other consequences that are not strict penalties, but can impact your startup substantially through:

  • Increased Scrutiny: Non-compliance could lead to increased scrutiny from regulatory agencies, which could result in more frequent audits or investigations. 
  • Operational Disruptions: Addressing non-compliance issues can be time-consuming and may divert resources from your startup’s core activities. 

How Startups Can Comply with the Corporate Transparency Act Requirements

In order to comply with the Corporate Transparency Act, all companies in the US, including startups, must report their beneficial owners to the Financial Crimes Enforcement Network. Beneficial owners are anyone who owns at least 25% of the company or are important decision-makers. The information that is required from each beneficial owner includes:

  • Date of birth
  • Full legal name
  • Current address of residence
  • An image of a valid ID

FinCEN also requires information about the reporting company including:

  • Full legal company name
  • “Doing business as” name
  • State of incorporation
  • Date of incorporation
  • Company’s address
  • Tax ID number

Startups that begin after January 1, 2024 must also report their company applicants. The information that is required of them is the same that is required of the beneficial owners. Company applicants are the individuals who worked to register your startup with the state. 

Who Exactly are the Beneficial Owners & Company Applicants?

A “beneficial owner” is any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

  • Exercises Substantial Control Over the Company: This includes individuals with significant authority over important decisions within the company, such as senior officers or those with significant influence on the board of directors. 
  • Owns or Controls at Least 25% of the Ownership Interest:  Ownership interests can include shares, membership interests, or any other form of equity. 

The CTA outlines specific exceptions for who does not need to be reported as a beneficial owner including: 

  • Minor children
  • Individuals acting as intermediaries or custodians on behalf of another individual
  • Employees whose control or economic benefits arise solely from their employment status
  • Individuals whose only interest in the company is through a right of inheritance
  • Creditors of the entity, unless they meet the substantial control or 25% ownership criteria through other means.

A “company applicant” refers to the individual(s) who file the documents that create a corporation, LLC, or similar entity. There are two main categories of company applicants:

  • Individual Who Files the Formation Documents: This is the person who physically files the paperwork to create the entity with the relevant state authorities.
  • Individual Who Directs or Controls the Filing of the Documents: This can include a lawyer or other professional service provider who directs the preparation and submission of the formation documents on behalf of another individual or entity.

What Makes CTA Reporting Challenging for Startups?

The initial beneficial ownership report must be updated every time a new beneficial owner changes. This can be especially challenging for startups due to the aggressive nature of a startup. 

For every new investor that will have an ownership stake more than 25% or if the CEO changes, the BOI report must be updated. For a company that works hard to grow quickly, these changes can happen more frequently, making the Corporate Transparency Act requirements more challenging. 

Contact Our Lawyers for Help with the Corporate Transparency Act as Your Startup!

Ensure your startup complies with the CTA by contacting our experienced lawyers at Corporate Transparency Act Filing Services. We specialize in helping startups go through complex regulatory requirements and can provide expert guidance on beneficial ownership reporting.

Contact us today to secure your business’s compliance and focus on growing your startup confidently. 

Corporate Transparency Act Filing Service

Corporate Transparency Act Filing Services
Email: lchapman@silverlawplc.com
Website: www.corporatetransparencylawyers.com

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