Business owners and entrepreneurs often have involvement with multiple organizations. They may diversify their holdings as a way of maximizing their income while mitigating their personal financial risk. They may also notice a gap in the local economy that they can fill after they begin operating one company.
It is common for one ambitious entrepreneur to own multiple organizations that may operate in adjacent industries. Someone who runs a small trucking company, for example, might also own a small repair shop that does service and repairs on commercial vehicles. Those with investments in multiple companies may need to worry about business activity that could look like money laundering or other financial crimes to outsiders because of their investment habits.
In 2021, lawmakers passed the Corporate Transparency Act (CTA) as part of a larger bipartisan bill. The law took effect as of January 1st, 2024. The goal is to identify those with any involvement with domestic companies. Do small businesses now need to file a report with a government agency identifying people who hold an interest in the company?
The courts have ruled the CTA unconstitutional
In theory, a broad range of small businesses might be subject to the CTA. Newly-established companies and longstanding businesses alike with opaque business structures were theoretically subject to the law. However, a federal district court judge in Alabama recently ruled that the law is unconstitutional. Effectively, the CTA is unenforceable.
While the law theoretically requires that corporations, LLCs and similar businesses send a report identifying anyone with a 25% or greater stake in the company, there are no longer any penalties for failing to do so. The Financial Crimes Enforcement Network (FinCEN) may not be able to impose fines the way that the law initially proposed. Businesses that have not yet filed the necessary report may never need to do so.
That being said, there are appeals and new legislation underway that could have implications for businesses with unclear ownership and the people who invest in them. Tracking changing state and federal business statutes is crucial for those who own or help operate companies. Proactive compliance with the law can help preserve company resources and the reputations of those who have invested.