Business Law

CORPORATE TRANSPARENCY ACT IN ACTION | TALES FROM THE TRENCHES – PART 1

And so begins the inevitable experiential anecdotes in this, the first year of implementation of the Corporate Transparency Act (“CTA”).  I wrote a general overview of this law on January 15, 2024.  I fully expected to encounter noteworthy experiences and information as this year progresses, and so far, I have not been disappointed.  I hope to continue to share our experiences, and invite you to do the same.

TALE #1: ARE WE A LARGE OPERATING COMPANY?

Before I posted my article, I got an email from a client asking me to confirm that his company would be exempt from the CTA based on the following:

For example, to take advantage of the “large operating company” exemption, an entity must (1) employ 20 full-time employees in the United States; (2) have an operating presence at a physical office in the United States and filed a federal income tax or information return in the United States demonstrating more than $5,000,000 in gross receipts or sales.

At first glance, based on what I knew about the company, I thought this was an easy yes.  As any lawyer must do, I went to the actual law to confirm.  Not surprisingly, I needed to ask some more questions.  For purposes of the exemption, the CTA has its own guidance regarding whether an employee is a “full-time employee,” and even what is considered the “United States!”  Generally, a full-time employee averages 30 hours per week, or 130 hours per month.   The United States means “[t]he States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States.”  In addition, “gross receipts” means “net of returns and allowances” and net of any such gross receipts or sales “from sources outside of the United States.”  Once I clarified these points with the client, I was able to confirm his company should be exempt from the CTA.

TALE #2:  THE PROCESS OF FILING THE BENEFICIAL OWNER INFORMATION (“BOI”) REPORT

I already have personal knowledge of an individual attempting to file the BOI report on his own.  While it was mostly correct, he omitted an individual with “substantial control” that was not an owner.  His experience was that one is not offered guidance in the process of completing the report; therefore, it is important that the client either receive competent advice or thoroughly review the informational materials provided by FinCEN and others prior to filing the report.

TALE #3:  OBTAINING AND USING FinCEN IDENTIFIERS

As discussed in the original article, the CTA allows individuals who are either a beneficial owner or otherwise exercise substantial control over a reporting company, to obtain a FinCEN identifier, and provide that to reporting companies in lieu of their personally identifiable information (“PII”) required by the CTA.  This allows the individual to submit their PII directly to FinCEN rather than the reporting company.  I am not sure how much comfort that provides the individuals, but it is an opportunity to simplify the obligations of the applicable reporting company(ies), discussed further below.

Your humble author is the proud owner of her own FinCEN identifier.  It was fairly easy to get one.  You can get yours here:  https://fincenid.fincen.gov/landing.  An interesting and query-inducing side note:  You will be required to log in using login.gov, which is a system maintained by the Federal government for use by the public and interaction with participating government agencies.  I tried to create a new account, and was told I already have one, though I have no recollection of ever setting up such an account.  I do, however, have an Id.me account that I set up some years ago.  Id.me is a third-party service used by some government agencies for interaction with the public (including IRS which, like FinCEN, is also part of the U.S. Treasury).  Perhaps there was some crossover there?  Who knows?  

Once I was able to log in, I was able to get the FinCEN identifier pretty easily, as I stated above.  I took a picture of my driver’s license and submitted that.  Now, if I move, I will have to file an updated report with FinCEN.  However, any companies for which I am a beneficial owner or otherwise have “substantial control” will not have to file an updated BOI report when my information changes.

Please consider a hypothetical based on a real example in our office.  Below is a chart (which has been abbreviated!) of companies in which our clients, two brothers, are involved as beneficial owners:  

These clients are incredibly fortunate to have (and to have had for a long time) a brilliant and capable assistant that helps them and us keep all of this straight.  Not all of our clients have that.

Imagine one person in charge of all of this, having to gather PII for all beneficial owners and others with substantial control as defined by the CTA.  Then imagine what happens when one brother moves.  In this hypothetical, one brother’s move would trigger TEN new BOI reports!  As you may have figured out, as did their brilliant assistant, the brothers are obtaining their own FinCEN identifiers.  We are also exploring the use of FinCEN identifiers for entities “upstream” of the reporting company.

I recommend, however, that this be taken a step further and that, in our hypothetical, all JV partners also obtain their own FinCEN identifiers.  This should ease the burden of the reporting companies regarding providing FinCEN with any updates to the personal situations of its beneficial owners and other with substantial control.

I further contend that this strategy is appropriate for any entity with more than one beneficial owner or other individual with “substantial control.”  One day I might contend it makes sense even for entities with only one applicable person.  I do not think it would be detrimental in any material way to take that approach.  

Again, stay tuned, I am sure there is more to come.

When it comes to why companies pursue joint ventures, they do so for a wide variety of reasons, some of which include developing new products or expanding into new markets, or perhaps for a temporary business project. In these instances, the pooling of two or more parties’ resources can provide a unique opportunity for growth. While joining with another party to accomplish a certain task or make aspirations a reality might sound like a win-win, there are important legal essentials to consider and pitfalls to avoid with the goal of maximizing success in joint ventures. 

Understanding Your Legal Obligations When Forming a Joint Venture

Put simply, a joint venture (JV) involves two or more persons or companies combining their resources, including assets, such as property and cash, and human capital to collaborate in a specific and defined project. It’s important that individuals and entities that are parties to the joint venture invest the time and resources necessary on the front end to memorialize their collective goals, rights, and obligations to minimize unforeseen legal and financial liabilities. Joint ventures should always involve defining the newfound arrangement in a contract; and the often involve founding a new joint company to carry out the joint venture.  In joint ventures implemented through a new company, the choice of entity is often a limited liability company, and the “contract” governing the joint venture is the new company’s operating agreement.

Whether the joint venture is implemented through a new company or not, having a joint venture agreement in place is essential. 

Matters Your Joint Venture Agreement Should Address

The fact that you even considered forming a joint venture suggests that you and the party you’re planning to work with have shared goals and objectives for this business arrangement; however, it’s important to properly and formally document that information in aJV agreement, as well as other details, such as:

• How much each party is contributing to getting the joint venture off the ground (in terms of assets and capital)
• Details about how long the JV is intended to last
• What will become of intellectual property rights secured and whether entering into a confidentiality agreement is necessary to protect them
• Descriptions of each party’s rights and responsibilities
• Details about how the JV will be managed
• Each party’s rights and obligations with respect to profits, losses, and taxes
• Procedures to follow if disputes arise or there’s a desire to terminate the agreement

This is not an exhaustive list of the details you’ll want to cover in the JV agreement, which is why you’ll want to have an experienced business law attorney help you draft this contract to ensure it upholds your best interests.

Ways To Avoid Problems When Setting Up or Operating Joint Ventures

One of the biggest impediments to the success of joint ventures is that parties in these arrangements rush into the joint venture without first making sure that they’re on the same page in terms of goals and expectations and consequently find themselves needing to make decisions as a collective despite having different management styles or perspectives on the business’ direction, i.e., who to hire on for key roles. So, having extensive conversations about this is critical, and if you decide to move forward with the venture, then documenting how you’re going to blend your approaches is key. 

Another issue that often arises with joint ventures is something that commonly plagues partnerships, which is ensuring equitable allocation of obligations between entities. For example, in strategic relationships, an equitable sharing of the workload may not always be feasible, which is why one party may contribute more financial resources, and another entity, more labor. Properly documenting these matters in the JV agreement, is key to minimizing potential conflicts.

It is also crucial to agree in advance regarding unwinding the joint venture should it not prove successful. Such an agreement mapping a potential dissolution of the joint venture minimizes legal battles that could be costly, time-consuming, and could affect reputations with vendors and customers. Conversely, if the joint venture is a success, the agreement should outline options for continuing the project once the initial term of the contractual agreement has come and gone.

Learning More About Joint Ventures and If They Are Appropriate for You

Wilson Ratledge, PLLC has long assisted entrepreneurs and businesses in creating a solid foundation for their companies to operate by negotiating and drafting agreements that accurately reflect their understanding and represent their best interests. A solid, well-written contract is key to minimizing potential disputes and costly and time-consuming litigation. 

We want to be of counsel to you as you assess whether entering a joint venture is in your best interest or whether some other business arrangement is. So, call or email our law office to meet with a business law attorney who will ask you some questions about the goals for your business enterprise and advise you whether setting up a joint venture or some other type of arrangement is best, and if so, craft an agreement incorporating each parties’ desired terms and conditions. 

And, if you’ve already entered into a joint venture and are facing a business dispute, you can also contact us to review your JV agreement and advise you of your options.    

Y’ALL READY FOR THIS?

If you own or manage a small business, unless you have been living under a rock the past year or so, you have almost certainly heard about the Corporate Transparency Act (“CTA”) and the new requirements for “beneficial owner information” (“BOI”) reporting.  First, I have included some TL; DR takeaways, and below that, more detailed discussion of the new law.  Each takeaway is linked to the relevant discussion below.  Be advised that this article is for general informational purposes and does not constitute, or provide suitable substitute for, legal advice.  This is information is current as of January 1, 2024.

For the most recent update as of April 10, 2025, click here. For the update from February 20, 2025, click here. For the update from February 7, 2024, click here. For the update from December 3, 2024, click here.

TL;DR

1. DOES THIS APPLY TO MY COMPANY? Unless your company qualifies for one of the 23 specific exemptions, this new law is something you must contend with.  Most businesses will be affected.
2. WHAT DO I HAVE TO DO?  You must file a report with FinCEN identifying information (name, date of birth, address, unique identification number, and copy of documentation of identification number) for your company’s “beneficial owners” (as defined by the law).  You should be reviewing and implementing protocols to ensure the accuracy of identifying information provided to you for purposes of the CTA.  These protocols should include measures to maintain the confidentiality of this information, just as owner information reported for tax and record-keeping purposes should remain private. See also the discussion below concerning the recently promulgated rules concerning access to information received and stored by FinCEN.¹
3. WHEN DO I HAVE TO DO IT?  If your company was created before 1/1/2024, you have until January 1, 2025 to file your initial report.  If your company was created on or after January 1, 2024, you have 90 days from the company’s creation to file the initial report, which must include the same information for the “company applicant(s)” (as defined by the law) as required for beneficial owners.  Companies created after January 1, 2025 will have 30 days from the company’s creation to file the initial report.  
4. DO I HAVE TO DO THIS EVERY YEAR OR EVER AGAIN?  Reporting is not an annual requirement; however, new reports must be filed within 30 days if there is a change in any information previously reported.  Errors must be corrected within 90 days of the filing of the inaccurate information or, if later, 30 days after you become aware of the inaccuracy. See section (a)(3) of 31 CFR 1010.380.
5. WHAT HAPPENS IF I DON’T FILE?  The law provides for various penalties.  Your company may be subject to penalties of $500 per day for failing to file the report.  Individuals by be fined up to $10,000 or imprisoned for up to two years upon conviction for willfully failing to file or willfully filing inaccurate information.  These penalties increase to up to $500,000 and ten years of imprisonment if noncompliance is part of additional illegal activity. See section (h)(3)(B)(ii)(II) of 31 U.S.C 5336.

DISCUSSION

Introduction

The new law was enacted in 2021 and is the result of years of legislative efforts going back to 2008 to give law enforcement agencies (primarily) information to combat financial crimes.  Accordingly, the new law is enforced by the Federal Financial Crimes Enforcement Network (“FinCEN”).  The background of this new law is beyond the scope of this article; however, the American Bar Association has an excellent discussion of this at the link provided in the notes below.²

The CTA is enshrined into law in Section 5336 of Chapter 31 of the United States Code.³  The core of the law is this statement: “In accordance with regulations prescribed by the Secretary of the Treasury, each reporting company shall submit to FinCEN a report that contains the information described in paragraph (2) [of 31 U.S.C. 5336(b)]”.  Paragraph (2) provides that this report will “identify each beneficial owner of the applicable reporting company and each applicant with respect to that reporting company by (i) full legal name; (ii) date of birth; (iii) current, as of the date on which the report is delivered, residential or business street address; and (iv)(I) unique identifying number from an acceptable identification document; or (II) FinCEN identifier in accordance with [certain] requirements….” (Emphasis added).  The rules implementing the CTA further require that the report include an image of the document from which the unique identifying number is obtained, which must be a current U.S. passport, State or Indian tribe issued identification, State issued driver’s license, or current non-U.S. passport if the individual does not have any of the other listed documents.

As you can imagine, there is a lot to unpack in this deceptively short core provision of the law.  There are numerous definitions, exceptions, and exemptions in the statute and in the accompanying rules/regulations.  The rules and regulations are found in 31 CFR (Code of Federal Regulations) 1010.380.⁴ Thankfully, FinCEN has published helpful guidance in the form of the Small Entity Compliance Guide⁵ and has compiled a health list of frequently asked questions (and answers).⁶  

The CTA defines “reporting company” as “a corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”  This definition encompasses essentially every form of entity that can lawfully do business in the U.S., including but not limited to corporations, professional associations, limited liability companies, professional limited liability companies, limited partnerships, non-profit corporations, and business trusts.

There are 23 exemptions; however, these will not apply to many small businesses.  Generally speaking, these exemptions include publicly traded companies, governmental bodies, banks, credit unions, brokerages, investment companies, insurance companies, public accounting firms, public utilities, tax exempt entities (not all non-profits-for example, most home owner associations will be subject to reporting requirements unless the law is changed⁷), inactive companies, and large operating companies.  Generally speaking (again), a “large operating company” will employ more than 20 full-time employees (under applicable laws), will have an operating presence at a physical office within the United States, and will have reported more than $5,000,000 in gross receipts or sales (net of returns or allowances) on its prior year’s Federal income tax return.  

Reporting Obligations

As noted above, the CTA requires any reporting company to submit to FinCEN a report that identifies the reporting company’s beneficial owners and company applicant(s) by (i) full legal name; (ii) date of birth; (iii) current, as of the date on which the report is delivered, residential or business street address; and (iv)(I) unique identifying number from an acceptable identification document; or (II) FinCEN identifier in accordance with [certain] requirements….”  The report must also include an image of the document from which the unique identifying number is obtained, which must be a current U.S. passport, State or Indian tribe issued identification, State issued driver’s license, or current non-U.S. passport if the individual does not have any of the other listed documents.

The term “beneficial owner” of an entity means “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity; and does not include (i) a minor child, as defined in the State in which the entity is formed, if the information of the parent or guardian of the minor child is reported in accordance with this section; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an individual acting solely as an employee of a corporation, limited liability company, or other similar entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person; (iv) an individual whose only interest in a corporation, limited liability company, or other similar entity is through a right of inheritance; or (v) a creditor of a corporation, limited liability company, or other similar entity [unless the creditor is also a beneficial owner of the company through an ownership interest that is separate from its interest as a creditor].” (Emphasis added).

“Substantial Control” is not defined in the statute.  FinCEN provided in its Final Rule on beneficial ownership reporting that an individual exercises “substantial control” over a reporting company if the individual (1) serves as a senior officer of the reporting company, (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), (3) directs, determines, or has substantial influence over important decisions made by the reporting company, or (4) has “any other form of substantial control over the reporting company.”  

It may not always be clear who does and does not have “substantial control.”  Also, for many companies, calculating 25% ownership may be a simple matter. This can be more difficult, however, for a corporation with outstanding options, or for an LLC with an operating agreement that calls for a distribution waterfall.  Other scenarios in which it may be difficult to determine whether a person or entity must be included in the report include reporting companies involving trusts, convertible debt, directors that are not also owners, and other arrangements where substantial control may exist purely by contract, among others, as evidenced by the lengthy FinCEN FAQ page mentioned above and linked in the notes below.

The final rule allows an individual (beneficial owner or the applicant(s)) to provide a FinCEN identifier in lieu of the other personally identifying information required. 

“FinCEN identifier” means the unique identifying number assigned by FinCEN to an individual or reporting company under the CTA.  An individual must apply to FinCEN for this identifier and in doing so, must provide the same information that it would otherwise provide to the reporting company.  If an individual has concerns about providing this information to the reporting company, then such individual can provide the FinCEN identifier instead.  This does not, however, allow a beneficial owner to withhold information that a reporting company may need for other purposes, such as for banking purposes, or preparation of tax returns.  Information reported to FinCEN will not be public, and will be available to Federal, State, local, or Tribal law agencies in accordance with rules promulgated by FinCEN.  The final rule was promulgated December 22, 2023⁸.

“Company applicant” means the individual who directly files the document that creates the reporting company or first registers a foreign reporting company AND the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.  

Filing the Report

FinCEN is responsible for providing the format and platform for filing the report, which must be done electronically.  In the final rules and regulations, FinCEN has provided that the initial report of a reporting company shall include (and presumably subsequent reports will have the same requirements) the reporting company’s full legal name; any trade name or “doing business as” name; a complete current address consisting of the street address of the principal place of business or the primary location in the United States where a foreign reporting company conducts business in the United States; the State, Tribal, or foreign jurisdiction of formation of the reporting company and, for a foreign reporting company, the State or Tribal jurisdiction in the U.S. where such company first registers; and the Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.  The link to the FinCEN page where the report can be initiated is provided in the notes below.⁹

Important Deadlines

Reporting companies in existence prior to the effective date of FinCEN’s implementing regulations have one year (until January 1, 2025) to file their first beneficial ownership report, which, notably, does not have to include information for the company applicant if that person is not also a beneficial owner.  Reporting companies formed on or after January 1, 2024 (or registered to do business in the U.S. on or after that date) must provide the required report for each beneficial owner, and for the company applicant.  For 2024, these reports must be filed within 90 calendar days after the reporting company is created or registered to do business in the U.S.  Reporting companies formed or registered on or after January 1, 2025, under the current rules, must file the report within 30 calendar days after the reporting company is created or registered to do business in the U.S.  

Updates to information reported must be filed within 30 calendar days of any change.  It is worth noting here that if a reporting company files a report and subsequently meets the criteria for one of the exemptions, the reporting company will be required to file an updated report.  Conversely, if an exempt company that has never filed a report no longer meets the criteria for any of the exemptions, the reporting company must file its initial report within 30 calendar days thereafter.  Other update triggers include interests passing through inheritance, and a minor child reaching the age of majority if prior reporting included the information of a parent or guardian in lieu of the minor child’s information.

In addition, corrections to inaccuracies must be reported before the later of 90 calendar days of the date the inaccurate report was filed, or 30 calendar days after the date on which the reporting company becomes aware of or has reason to know of the inaccuracy.  

Penalties for Non-Compliance

There are multiple penalties for non-compliance with the CTA, and they are significant.  The reporting company will be subject to a fine of $500 per day for failing to file a BOI report. Individuals may also be fined up to $10,000 or imprisoned for up to 2 years upon conviction for willfully failing to file or willfully filing inaccurate information.  When a failure to file is combined with other illegal activity, or is “part of a pattern of any illegal activity involving more than $100,000 in a 12-month period,” criminal penalties can be increased up to $500,000 and imprisonment for up to 10 years.

CONCLUSION

Reporting companies will need to devote the necessary resources, attention, and senior personnel to ensure timely and accurate reporting to FinCEN, similar to but perhaps more stringent than requirements surrounding tax reporting.  Competent legal advice will be critical, especially in the early stages of the implementation of this new law.  I expect the upcoming year to be eventful as small businesses work to understand and comply with the CTA, and as questions inevitably and continually arise.  Hopefully, FinCEN will continue to put out guidance as the practical implications bear out.  You can sign up to receive FinCEN updates here.  Stay tuned…

HELPFUL LINKS:

• https://www.fincen.gov/sites/default/files/shared/BOI_FinCEN_Brochure_508C.pdf
• Introductory video (0:55) https://www.youtube.com/watch?v=nx48tPUbRK0
• Informational video (4:27) https://www.youtube.com/watch?v=qQ5ABgZ6Xn4
• https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
• https://www.fincen.gov/boi-faqs
• https://www.fincen.gov/boi

ENDNOTES:

^1. See note 8 and related discussion.

^2. https://www.americanbar.org/groups/business_law/resources/business-law-today/2021-may/the-corporate-
transparency-
act/#:~:text=The%20Corporate%20Transparency%20Act%20requires,Treasury%20(%E2%80%9CTreasur
y%E2%80%9D).

^3. https://www.govinfo.gov/content/pkg/USCODE-2022-title31/pdf/USCODE-2022-title31-subtitleIV-
chap53-subchapII-sec5336.pdf

^4. See: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-
information-reporting-requirements; https://www.federalregister.gov/documents/2023/11/08/2023-
24559/use-of-fincen-identifiers-for-reporting-beneficial-ownership-information-of-entities#citation-1-
p76995; and https://www.federalregister.gov/documents/2023/11/30/2023-26399/beneficial-ownership-
information-reporting-deadline-extension-for-reporting-companies-created-or#sectno-citation-1010.380

^5. https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf

^6. https://www.fincen.gov/boi-faqs

^7. https://blog.lawfirmcarolinas.com/what-is-the-corporate-transparency-act-and-why-it-matters-to-your-
association-and-directors/

^8. https://www.federalregister.gov/documents/2023/12/22/2023-27973/beneficial-ownership-information-
access-and-safeguards#sectno-citation-1010.955

^9. https://www.fincen.gov/boi

Starting a business is an exciting venture, and it is crucial to select the right business structure that aligns with your business goals and desired level of protection. In North Carolina, the most common business entities are the Sole Proprietorship, Limited Liability Company (LLC), S Corporation, and C Corporation. This article will provide a brief overview of each entity and highlight their key differences in structure and tax treatment.

If you are considering starting a business, the professionals at Wilson Ratledge are here to help. We have decades of experience helping the Triangle’s entrepreneurs and welcome the opportunity to talk to you about your new business entity.

1. Sole Proprietorship/Partnership

A sole proprietorship or general partnership is the simplest form of business structures to create. A sole proprietorship is an unincorporated business owned by a single individual, while a partnership is an unincorporated business owned by more than one individual.  With both, there is no separation of liabilities (no “corporate veil”) insulating the owner(s) from liabilities arising from the operation of the business.

Key Features:

• Liability: The owner(s) has(have) unlimited personal liability for business debts and obligations.
• Formation: No formal registration is required with the state. 
• Management: The owner(s) has(have) full control over business operations.
• Taxation: “Pass-through” (also commonly referred to as “flow-through”)-no “double-tax” (see discussion of C corporations, below). For sole proprietorships, the business tax return is part of the owner’s personal return.  A general partnership files an information return, however, tax items “pass through” or “flow through” to the partners and are reported on personal income tax returns as well.
• Termination:  The life of the sole proprietorship ends with the death of its owner, and, generally, the life of a partnership ends when there is only one partner.

There are other forms of partnerships with varying degrees of liability protection; however, the scope of this article is limited to the more common business entities.  Because partnerships do not offer the liability protection that limited liability companies and corporations do, they are less and less common.  You can find helpful general information on the various partnership structures available in North Carolina here.

2. Limited Liability Company (LLC)/Limited Liability Partnerships

The appeal of an LLC often comes from both (i) the protection it offers (“corporate veil”) against personal liability for the company’s liabilities (except to the extent an owner has to personally guaranty, such as for a bank loan or lease) and (ii) taxation.  There is no separate chapter of the Internal Revenue Code that applies to LLCs, which are essentially a hybrid of corporations and sole proprietorships (for LLC’s with one owner,  known as single-member LLCs) or general partnerships (for multi-member LLCs).  A single-member LLC can remain a sole proprietorship for tax purposes (by default), or elect to be taxed as a corporation (typically an S corporation).  A multi-member LLC can remain a general partnership for tax purposes (by default), or elect to be taxed as a corporation (again, typically an S corporation).  

Another benefit of the multi-member LLC that is taxed as a partnership, is flexibility in allocations of taxable items (profits, losses, capital gains, etc.), resulting in the ability to structure “waterfall” provisions for founders and investors.   This flexibility is not available to S corporations, and similar benefits for shareholders in a C corporation require various classes of stock (preferred or common, which can be further designated as different series-Series A, Series B, etc.).

Key Features:

• Liability: Members’ personal assets are generally protected from business debts and liabilities.
• Formation: Requires filing Articles of Organization with the North Carolina Secretary of State.  
• Management: Members can manage the LLC or delegate management to designated managers. An operating agreement is highly recommended to govern the entity, especially in a multi-member LLC, similar to bylaws for a corporation.
• Taxation: Typically taxed as a “pass-through” (“flow-through”) S corporation or partnership, no “double-tax” (see discussion of C corporations, below). Profits and losses flow through to members’ personal tax returns (and can be allocated other than pro-rata if the LLC is taxed as a partnership).  An LLC can also choose to be taxed as a C corporation.
• Continuity of Life: Except in the case of a disregarded entity, the life of the entity continues regardless of the death or exit of its owners, until a separate dissolution event occurs. 

3. S Corporation

Historically, businesses were either sole proprietor/partnerships, or corporations. Corporations offered continuity of life and liability protection and the others did not.  While partnerships and LLCs evolved and retained many partnership characteristics, the world of corporations also evolved with the introduction of S corporations.  S corporations are essentially traditional corporations but with pass-through tax treatment similar to partnerships, discussed below; however, this structure is available only to “small businesses” which are limited in the number and type of shareholders they can have, along with other rules.  

Unlike traditional C Corporations that produce double taxation for their shareholders—first, business profits are taxed at the corporate level, and dividends are further taxed at the shareholders’ personal level—an S corporation allows for pass-through taxation, similar to a partnership. This means the corporation itself does not pay income tax. Instead, business income, losses, deductions, and credits flow through to shareholders, who report these on their individual tax returns, avoiding the “double tax”.

Another benefit of the S Corporation is the potential for reduced self-employment taxes. Here’s how it works: owners who also provide services to the business must be paid a “reasonable” salary for those services, which is subject to employment taxes (payable by the corporation and the employee).  However, profits are taxed only as pass-through income, which is not subject to employment tax.  Note: these profits are taxable whether the owner takes a draw on them or not.  This is true for any tax pass-through or flow-through entity.

However, while there are benefits to the S corporation structure as discussed above, it also comes with its own shareholder eligibility and other administrative requirements. Any entrepreneur considering this path should seek legal and tax advice to navigate the complexities.

Key Features:

• Liability: Shareholders have liability protection.
• Formation: Initially formed as a C Corporation and then elects S Corporation status through the IRS.
• Management: Shareholders elect a board of directors for high level oversight of officers, who manage day-to-day business operations.  In a small business, one person may fill more than one of these roles.
• Taxation: “Pass-though, no “double-tax” (see discussion of C corporations, below)
• Continuity of Life: The life of the entity continues regardless of the death or exit of its owners, until a separate dissolution event occurs.

4. C Corporation

One reason founding entrepreneurs might opt for a C Corporation over other entities is that the business plan contemplates rapid and significant growth, and raising additional capital from investors such as venture capital and private equity groups who have a marked preference for the structure and familiarity of a C Corporation.

Being free of the restrictions placed on S corporations, C Corporations also have wider latitude in employee benefits like stock options, health benefits, and retirement plans. In today’s labor market, these benefits can also make the C corporation an appealing choice for recruiting and retaining the best talent.

Lastly, on the flip side of the double taxation coin discussed above, if rapid growth and expansion are a part of your business plan, C Corporations are uniquely able to retain and reinvest earnings from one year to the next offering a distinct advantage for businesses that prefer to channel their profits back into the company rather than distribute them immediately.

Key Features:

• Liability: Shareholders have limited liability protection.
• Formation: Requires filing Articles of Incorporation with the North Carolina Secretary of State.
• Management: Shareholders elect a board of directors for high level oversight of officers, who manage day-to-day business operations.
• Taxation: Subject to double taxation. The corporation pays taxes on its earnings, and shareholders pay taxes on dividends.
• Continuity of Life: The life of the entity continues regardless of the death or exit of its owners, until a separate dissolution event occurs.

Contact Our North Carolina Business Formation Attorneys

Choosing the right business entity depends on various factors such as your business goals, desired level of control, tax implications, and potential risks and liabilities. Remember that the decision isn’t set in stone—you can change your business structure as your company grows and needs change. It is critical that you consult with a business attorney to understand which entity is best suited for your startup. Whether you are just starting out or looking to restructure an existing enterprise, the North Carolina business attorneys at Wilson Ratledge are here to guide you every step of the way. Reach out to us today to schedule a consultation. 

Business succession planning is essential to any business for a number of reasons. These include:

1. Ensuring a smooth transition of ownership and management.
2. Maintaining continuity of operations in the event of the death or incapacity of a current owner or key executive leader.
3. Identifying and preparing potential candidates for key leadership roles.
4. Providing legal and financial protections for the business and its stakeholders.
5. Contributing to the overall success and growth of the business.
6. Ensuring compliance with relevant laws and regulations.
7. Maintaining peace in the family.

In North Carolina, businesses must adhere to various legal considerations and requirements when engaging in succession planning. 

In this article, the North Carolina business succession planning attorneys at Wilson Ratledge will outline basic succession planning options and some of the key legal considerations.

Legal Considerations for Succession Planning in North Carolina

There are several legal considerations that businesses in North Carolina must take into account when engaging in succession planning. These include:

a. Business Structure: The type of business structure, such as a sole proprietorship, partnership, or corporation, will determine the legal requirements and procedures for succession planning. For example, partnerships may require the execution of a partnership agreement outlining the terms of succession. At the same time, corporations may need to follow specific procedures outlined in the articles of incorporation and bylaws. S corporations in particular must adhere to IRS rules regarding eligible S corporation shareholders.

b. Transfer of Ownership: The transfer of ownership in a business is subject to various legal considerations, such as the execution of a buy-sell agreement and estate planning documents (wills and trusts) to implement the terms of a buy-sell agreement, orderly transfer of business interests, and planning for minimizing, while having liquidity for, the payment of any applicable taxes. It is important for businesses to seek the guidance of an attorney when engaging in the transfer of ownership to ensure compliance with relevant laws and regulations.

c. Management Succession: The process of transferring management responsibilities in a business can also be subject to legal considerations, such as the use of key-man (or key-person) life insurance, executive compensation, the joinder in a limited liability company operating agreement or partnership or limited partnership agreement. It is crucial for businesses to consult with an attorney to ensure that the management succession process is carried out as smoothly as possible and in accordance with the law.

North Carolina and Federal Laws Governing Succession Planning

There are several North Carolina and Federal statutes, many with related regulations, that businesses and business owners must consider when engaging in succession planning and implementing a succession plan; however, none of these spell out any automatic process in the absence of planning. These include (among others):

a. North Carolina Business Corporation Act

b. North Carolina Limited Liability Company Act

c. North Carolina Revised Uniform Partnership Act

d. North Carolina General, Limited, and Limited Liability Partnerships 

e. North Carolina (wills and estates 28A-31?)

f.  North Carolina Uniform Trust Code

g. Subchapter C of the Internal Revenue Code (Federal Taxation of C Corporations)

h. Subchapter S of the IRC (Federal Taxation of S Corporations)

i.  Subchapter K of the IRC (Federal Taxation of Partnerships)

j. Federal Taxation of Trusts

k. Federal Estate and Gift and Generation Skipping Tax

Tips for Successful Succession Planning in North Carolina

Here are some tips for successful succession planning in North Carolina:

a. Start Early: It is never too early to start planning for succession. By starting the process early, business owners can ensure that there is sufficient time to determine long term goals, identify and prepare potential candidates to own and lead the business in the future, and to implement the necessary legal arrangements.

b. Involve Key Stakeholders: Succession planning should involve the input and participation of key stakeholders, such as the current owner and potential future owners, key management personnel. This will help to ensure that the succession plan reflects the needs and goals of the business and all parties involved.

c. Communicate Openly and Transparently: Communication between potential successors and beneficiaries is often key to successful succession planning. This will also help avoid potential legal disputes, such as those involving a contest of the owner’s will in the case of a family business, or those involving disgruntled key management or other personnel. 

d. Seek Professional Advice and Assistance: Engaging the services of a professional advisor, such as that of a North Carolina business attorney at Wilson Ratledge, will guide you and help you navigate the many succession plan options and their legal and tax considerations. 

e. Put the Plan in Writing: This applies to everything.  We have mentioned a few crucial documents already, and successful implementation of your succession plan requires a package of clear and consistent documents that will work together to ensure the smooth transition of your small business as part of your overall estate plan.  The documents typically required include some combination of the following:

i. Buy-Sell Agreements (also known as Shareholder Agreements or Member Agreements)

ii. Wills

iii. Trusts (there are multiple options for trusts in succession planning)

iv. Operating Agreements

v. Partnership or Limited Partnership Agreements

f. Review and Update the Plan Regularly: Succession plans should be regularly reviewed and updated to ensure that they remain relevant and reflect the current needs and goals of the business and key stakeholders. 

Starting a business in North Carolina can be a great way to make money and provide your own unique service or product. However, there are a few things you should know before starting your business. In this article, we will discuss some of the most important things you need to know before starting a business in North Carolina. 

1. Choose a Business Idea and a Business Name

When starting a business in North Carolina, it is important to choose a business name and a business idea. The name should be unique and easy to remember, and the idea should be something that you’re passionate about. It is also important to do your research and make sure that the idea you have is feasible and has the potential to be successful.

2. Decide on a Legal Structure

There are many factors to consider when deciding on a legal structure for a business. Some of the most important factors include the amount of liability the business owner wants to assume, the tax implications, and the ease of dissolution. There are several types of legal structures businesses can choose from in North Carolina, including sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.

3. Register the Business Name and Area of Specialization

When starting a business in North Carolina, the next step is to register the business name with the state. This can be done online or by mail. The next step is to choose an area of specialization for the business. This can be anything from retail to construction to professional services. Once these steps are completed, the business is almost ready to start operating in North Carolina.

4. Pick a Business Location and Check Zoning Regulations

When starting a business in North Carolina, it is also important to check the zoning regulations for the specific location you choose. This will ensure that the business is in compliance with all local ordinances and can operate without any issues. There may be specific requirements for the type of business that can be operated in a particular location, so it is important to do your research ahead of time. If you are unsure of what is required, it is best to contact your local zoning department for more information.

5. Obtain the Proper Permits and Licenses From The State

In order to start a business in North Carolina, one must first obtain the proper permits and licenses from the state. This process can be complex, as different licenses and permits may be required depending on the type of business being started. Some of the most common licenses and permits required include a business license, a sales tax license, and a zoning permit. It is important to confirm what licenses and permits are required for your specific business and to contact the appropriate state agencies for more information.

6. Obtain Insurance

Obtaining insurance when starting a business in North Carolina is important to protect the business from any potential liability. Businesses need a variety of insurance policies, such as general liability insurance, property insurance, and workers’ compensation insurance. By doing so, businesses are not only abiding by the law, but they are also protecting themselves from financial losses in the event of an accident or disaster.

7. Open a Business Bank Account

When starting a business in North Carolina, it is important to open a business bank account. This account will help you track your business finances and keep your personal finances separate. You will need to provide your business name, address, and federal tax ID number to the bank when opening the account.

8. Remember To File and Report Taxes

The North Carolina Department of Revenue and the Internal Revenue Service require all business owners to file and report taxes, regardless of the size or type of business. The departments provide a variety of resources on its website to help business owners understand and comply with the tax requirements. Failure to file and report taxes may result in penalties and interest charges.

Contact Our North Carolina Business Startup Law Firm

When starting and during operations of a business in North Carolina, it is important to work with a lawyer. A lawyer can help you understand the complex legal process involved in starting a business and can provide guidance on corporate law, contract law, and other legal issues that may arise. A lawyer can also help you negotiate and sign contracts, file trademarks, and patents, and protect your business’s intellectual property.

If you have any questions, it is best to consult with a North Carolina business startup lawyer at Wilson Ratledge, PLLC. Our attorneys can help you navigate the process and ensure that your business is set up for success.