In 2021, Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act, introducing it as an “anti-money laundering” measure. Effective January 1, 2024, businesses around the United States must file Beneficial Ownership information (BOI) reports to be submitted to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Although purportedly intended to prevent illegal financial activities, the implications of the CTA are complex and far-reaching.
What is the Corporate Transparency Act?
The Corporate Transparency Act requires all small businesses in the U.S. to file and submit a Beneficial Ownership Report (BOI) to FinCEN. FinCEN will use this information to implement enhanced surveillance protocols over the bank accounts of both corporate entities and their beneficial owners detect financial crimes such as money laundering, tax fraud, corruption, terrorist financing, trafficking in controlled substances like marijuana, etc.
The BOI report consists of three levels of information: company level, applicant level, and beneficial owner level. Company level information refers to the legal name and tradenames of the state-registered corporate entity such as a corporation or LLC, its address and jurisdiction of registration, taxpayer identification number and employer identification number. Applicant level includes the personal information of the person who filed the incorporation documents, and any other person who is “responsible for directing or controlling” the filing.
And lastly, the beneficial owner level requires the submission of the legal name, address, identification document number and photo of the former for every beneficial owner of the small business. Beneficial owner is further defined in the legislation as anyone who exercises “substantial control” over the reporting company or owns/controls at least 25% of ownership interest. Control might include corporate officers or managers who work as employees even if they hold no ownership.
The details and implications of this law are immense, as it will lead to a national database containing vast amounts of personal and business information.
Who is Affected by CTA and How?
The CTA applies to nearly all businesses registered with at the state level, as well as foreign companies operating in the U.S. However, there are 24 categories exempt from filing BOI reports, including banks, credit unions, governmental authorities, tax exempt entities, and accounting firms that are already under federal oversight. Large corporations – defined as entities with at least 20 full-time employees, physical office location in the U.S. and at least $5 million in gross receipts from the previous year – are also exempt. The CTA does not apply to pass-through entities like sole proprietorships, general partnerships, and trusts.
Consequently, small businesses are disproportionately affected. As opposed to their larger counterparts, small businesses usually do not have separate compliance departments to notify them about new legal requirements. For a small business owner, this translates into added costs and administrative burdens for the unfamiliar filing process.
Filing Deadlines and Penalties: A Heavy Hand
Effective from January 1, 2024, the CTA allows all existing small businesses nationwide until January 1, 2025 to file their BOI report. The entities opened/registered after the deadline will be required to submit their BOI report within 30 days of receiving their registration confirmation. Fines and penalties for non-compliance are severe: a willful provision of false or fraudulent beneficial ownership information or failure to report “complete or updated beneficial ownership information to FinCEN” by “any person” is punishable by a $500 per day civil penalty and up to $10,000 in fines and two years in federal prison.
If a small business hires a new department manager who could be construed as a “control person” and forgets to update their BOI report, the business could be subject to these penalties. The severity of the punishment may vary depending on the degree of non-compliance. For Nevada’s 312,000 small businesses, many of which are already battling harsh economic climate, these penalties could be devastating.
CTA’s broad sweep is expected to affect over 33 million existing small businesses in the United States, alongside another 5 million that are created each year. Ironically, in the efforts to combat large-scale financial crimes, CTA artificially fabricates a new type of burden falling disproportionately on “mom and pop” shops.
Privacy Concerns: Is Your Information Safe?
While the BOI database is supposed to be inaccessible to the public, naturally, doubts about the ethical usage of such sensitive information arise. The law outlines six types of entities that can request your BOI report after it has been filed – federal agencies engaged in national security intelligence and law enforcement, state law enforcement agencies (with a court order), the U.S. treasury department, financial institutions (with applicant’s consent), government regulators of financial institutions, and foreign authorities requesting information through a U.S. agency. Although the access appears to be strictly limited, it opens room for privacy concerns.
The BOI database, for instance, could be exploited by ideological political appointees to target specific Americans, as happened in the Lois Lerner scandal. As IRS director in the Obama administration, Lerner systematically targeted organizations that included key words such as “Tea Party” in their names for audit procedures. The BOI database would expressly empower FinCEN to requiring financial institutions to increased surveillance procedures on specific individuals and business entities over which FinCEN holds concerns.
Even if the absence of bad faith by federal appointees, the BOI database could become a target for hackers. In 2019-20, a consultant with the IRS and advocate for higher taxes named Charles Littlejohn stole the tax records of thousands of Americans and supplied it to media outlet ProPublica. ProPublica detailed this stolen confidential information in a series of articles. Although Littlejohn was sentenced to five years in prison earlier this year, an audit of IRS data security completed this August revealed that IRS servers are still vulnerable to the method Littlejohn used to steal this information and that there had been more than 1,000 cases of unauthorized access to the taxpayer database between 2018 and 2023. Fewer than 1% of these data breaches have led to a prosecution.
Ongoing Legal Fights against Federal Overreach
The CTA has been met by justified resistance. Business registration and entity creation has been a state power throughout the history of the republic and does not fall within the enumerated powers granted to the federal government. The National Small Business Association (NSBA) has challenged the constitutionality of the law, and, in March, Alabama federal judge Lyles Burke ruled the CTA unconstitutional. This landmark decision was later met with a notice of appeal from the government while FinCEN accepted the decision as applying narrowly to only the 65,000 members of the NSBA at the time of the lawsuit.
There are ongoing legal battles by National Federation of Independent Business (NFIB), as well as plaintiffs in Maine, Michigan, and Texas. Additionally, Rep. Zach Nunn (R-Iowa), introduced the bipartisan Small Business Red Tape Relief Act to hold FinCEN accountable for educating affected small businesses on the new legal requirements.
Importantly, the CTA would expressly subvert the laws of states that allow for the creation of anonymous LLCs. Delaware, Nevada, New Mexico and Wyoming allow for these types of entities so business leaders can make acquisitions or other strategic moves without needing to disclose their identities up front.
“Congress sometimes enacts smart laws that violate the Constitution”
As Judge Burke mentioned in his memorandum opinion post-ruling, “Congress sometimes can enact smart laws that violate the Constitution.” The Corporate Transparency Act is more than a bureaucratic hurdle—it poses a serious threat to the foundation of American small businesses and the principles of economic freedom going against the Constitutional rights of the states and business owners. CTA’s expansive overreach raises privacy concerns, undermines the American entrepreneurial spirit and prompts decline in innovation. Lawmakers must urgently reconsider this legislation before it causes irreversible harm to millions of small businesses – the backbone of our nation’s economy.
