As readers may know, a newly effective federal law called the Corporate Transparency Act (the “CTA”) provides that almost all entities formed under U.S. state law except sole proprietorships must, by set deadlines, file reports with FinCEN, the U.S. Treasury Department bureau that handles CTA matters, about themselves, about holders of their ownership interests, about their managers and sometimes about other individuals. If they fail to file these reports or if they miss FinCEN filing deadlines, these companies and individuals may be subject to severe CTA civil and criminal penalties.

Mike Smith, a friend of mine who specializes in LLC law in Indianapolis, has raised with me the question whether individuals who are starting single-owner businesses should decide not to conduct their businesses as single-member LLCs, but rather as sole proprietorships, in order to avoid the risk of CTA penalties.

The answer to the question is unavoidably complex, but here are some guidelines on how to address it:

1. The use of single-member LLCs by individuals conducting single-owner businesses provides these individuals with potentially valuable statutory asset protections called “liability shields” and “charging order protections.” However, if third parties sue these individuals and if these third parties employ a widely used and often effective legal theory called the “alter ego theory,” some judges may rule that these individuals are not entitled to these protections.

2. However, notwithstanding this possibility, some individuals may use single-member LLCs to conduct their businesses because they believe that doing so will constitute good marketing. These individuals may believe that potential customers may do business with them because their businesses aren’t just sole proprietorship; they’re companies.

3. At least 32 million U.S. companies formed under state law, including almost all New Hampshire companies, must comply with CTA filing requirements. Thus, even if only for statistical reasons, it is very unlikely that FinCEN will audit them and impose penalties on them unless they have very substantial business income. However, if FinCEN does audit them, whether on a random basis or otherwise, and if there is evidence that they did not comply with the CTA requirements or were late in complying with them, it will simply hold these companies liable for CTA penalties and will leave it to the companies and their members to petition for FinCEN to remove them. This may take years and cost a lot of legal fees.

4. Thus, if Mary Jon es, a hypothetical individual forming a single-owner business, is debating whether to conduct her business as a sole proprietorship or as a single-member

LLC, she must ask herself the following questions:

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 How likely is it that a third party will ever sue her business?

 If a third party does sue her business, how likely is it that a judge will rule that she is not entitled to the above LLC statutory asset protections?

 How likely is it that FinCEN will ever make a claim against her?

 How likely is it that any potential customer will not do business with her if her business is a sole proprietorship but only if it is a single-member LLC?

5. How she answers these questions will determine whether she decides to conduct her business as a sole proprietorship or as a single-member LLC.