Key Corporate Transparency Act Considerations for Startups and Their Legal Counsel

Key Corporate Transparency Act Considerations for Startups and Their Legal Counsel

A Bloomberg Law article by Sarah Hibbard from Snell & Wilmer discusses the Corporate Transparency Act (CTA), which is currently facing ongoing constitutional challenges. This situation creates uncertainty for startups that need to navigate their beneficial ownership reporting requirements. Although one nationwide injunction was lifted in January, another remains in effect, temporarily suspending the mandatory filings with FinCEN. Startups can choose to comply voluntarily, or they can wait for further judicial rulings before proceeding.

The CTA applies to nearly all US entities unless one of 23 exemptions applies. According to Hibbard, most startups won’t qualify, as key exclusions favor large or heavily regulated entities. The “large operating company” exemption requires a US office, 20+ employees, and $5M+ in revenue—criteria many startups don’t meet.

Hibbard also notes that startups also face challenges in determining beneficial owners, particularly with convertible notes, SAFEs, and investor governance rights. Beneficial ownership includes those with “substantial control” or at least 25% ownership. Control may stem from board seats, veto rights, or influence over major decisions. Founders must assess governing documents—such as stockholder agreements and investor rights agreements—to determine reportable parties.

The ownership definition extends to options, warrants, and convertible debt, meaning startups must report individuals holding 25% of outstanding principal in convertible instruments. Due to pricing uncertainty, compliance remains complex.

Law firms representing startups should proactively monitor court rulings and legislative efforts, as the current reporting pause could be lifted at any time. Attorneys should help clients determine whether they qualify for an exemption and, if not, guide them through the complexities of identifying beneficial owners, particularly in cases involving venture capital investment or convertible instruments. 

By advising clients on accurate reporting and mitigating risks of noncompliance, firms can help startups avoid potential civil and criminal penalties under the Corporate Transparency Act.