Are you a small business owner with a registered LLC? Have you heard about the Corporate Transparency Act? If you own a small business or are considering starting one in 2024, you must file a Beneficial Owners Information (BOI) Report as soon as possible during this calendar year.

Corporate Transparency Act Background

The purpose of the Corporate Transparency Act (CTA) is to identify the “beneficial owners” of a 25% stake or more in smaller entities, like single-member LLCs. This information will be collected in a single non-public database, available to law enforcement. The reporting will be done through the Financial Crimes Enforcement Network (FinCEN), which is part of the US Treasury.

You may think – why does this even apply to me and my business? The Corporate Transparency Act is meant to crack down on money laundering, securities fraud and other financial crimes by exposing the true owners of shell companies involved in these illegal activities. Most shell companies are LLCs with one or two owners. To find the bad guys among all the regular US small business owners, we all need to file a BOI report.

This new law applies to all businesses formed through their Secretary of State (mostly LLCs, with a few additions). Foreign entities that register to do business in the US through a state Secretary of State must also file. There are some businesses which are exempt from this law, like accounting firms and charitable organizations, but it is best to assume that the CTA applies to your business and you need to file this report. While the filing itself is free and simple, the penalties for failing to file are no joke: $500 per day up to $10,000, and up to two years in prison.

How to File Your BOI Report

If your LLC was formed before January 1, 2024, you have this full calendar year to determine your beneficial owners and file your Beneficial Owners Information (BOI) Report. If you are a single member LLC, you are the Beneficial Owner.

If your LLC was formed during 2024 you must file your BOI within 30 days of the formation. Additionally, if you had a change to an LLC formed before 2024 including adding a partner or selling your business, you must file a BOI within 30 days of the change. The reporting is free through the FinCEN website, or you can reach out to an accounting or legal professional for guidance

This is not an annual filing; you only need to file a Beneficial Owners Information (BOI) Report once if your information does not change. If your LLC is inactive, you may qualify for an exemption, which you can read more about on this Corporate Transparency Act FAQ page.

Should I Even Start an LLC?

If you were just about to start a Limited Liability Company (LLC) for your side hustle and Corporate Transparency Act is one more hurdle preventing you from working for yourself, don’t despair! The BOI report is a free and easy form and the benefits of starting an LLC far outweigh this reporting requirement.

Even if your business is still in its infancy, it is worth starting an LLC for it. You can register your business name in the state where you do business and get immediate benefits from owning a business. Filing LLC paperwork is a declaration that you are serious about your business and its growth. Having an LLC also offers some personal and business legal protection which will be discussed below.

You can start an LLC by registering with your Secretary of State. The initial filing is usually about $100 and annual renewals are about $50 or less. This is a business expense that lowers your business taxes, so go ahead and file! Read on for more information about the power of an LLC.

1. Limited Liability Protection

One of the most compelling reasons entrepreneurs opt for an LLC is the limited liability protection it offers. Unlike sole proprietorships and general partnerships, where the business owner's personal assets are at risk in the event of lawsuits or debts, an LLC provides a crucial layer of separation between personal and business finances. This means that in the unfortunate event of legal action or financial turmoil, the personal assets of LLC members are typically shielded from business liabilities.

2. Flexible Taxation Options

LLCs enjoy a unique advantage in terms of taxation. By default, LLCs are considered pass-through entities for tax purposes, meaning that profits and losses "pass through" the business to the individual tax returns of the LLC members. This form of LLC is sometimes also referred to as a “single member LLC”.

Depending on the size, structure and type of business you are running, your LLC can also elect to be taxed as a corporation (either an S or a C Corp). The business will file its own tax return, but the other benefits of being both the owner and an employee of your business would likely outweigh that additional expense. LLCs can also be taxed as a partnership, which may be the right structure for a real estate investment or a business with outside investment or multiple active and silent partners.

3. Credibility and Perpetual Existence

Establishing an LLC can also enhance the credibility of a business in the eyes of customers, vendors, and potential partners. The formalized structure of an LLC demonstrates a commitment to professionalism and longevity, which can instill confidence in stakeholders. As a registered LLC with a Federal Employer Identification Number (FEIN) from the IRS, your business can also open business bank accounts and apply for business loans as its own entity.

Additionally, unlike sole proprietorships, LLCs have perpetual existence, meaning that the business can continue to operate even if one of the members leaves or passes away, providing continuity and stability. If you are scaling your business to potentially sell it, adding the legal structure of an LLC early in your growth cycle is a good idea.

4. Asset Protection and Estate Planning

For entrepreneurs with substantial personal assets, an LLC can serve as a powerful tool for asset protection and estate planning. By structuring assets within an LLC, individuals can safeguard their wealth from potential creditors and streamline the transfer of assets to heirs in the event of incapacity or death. This strategic approach can provide peace of mind and ensure the preservation of wealth for future generations.

Conclusion

Even with the new Corporate Transparency Act and the Beneficial Owners Information Report requirement, the benefits of an LLC outweigh the small amount of fees and paperwork involved to officially register your business.

Establishing an LLC can be a strategic move that offers a multitude of benefits, ranging from limited liability protection and flexible taxation options to operational flexibility and enhanced credibility. If you need support to get the most out of your business or your growing side hustle, Smart Sister Finance is here for you. Let’s talk about building your wealth while safeguarding your personal assets with an LLC.