Courts Shut Down Corporate Transparency Act — For Now
The Corporate Transparency Act has been halted. This injunction poses relief, and uncertainty, for small businesses grappling with compliance costs. As it faces potential Supreme Court deliberation, the act’s implications on privacy, regulatory burdens, and anti-money laundering efforts remain a critical debate.
The Corporate Transparency Act, which went into effect on January 1, 2024, and which was expected to saddle more than 30 million American small businesses with significant compliance responsibilities and costs, was ruled unconstitutional on March 1, 2024 by a U.S. District Judge in Alabama. A spokeswoman for the Treasury Department said the agency is complying with the court’s injunction, but didn’t indicate whether or not the government would appeal the ruling.
What Does This Mean?
As of now, the FinCEN website portal is still open for the filing of Beneficial Ownership Information (BOI) reports, although the obligation to report has been at least temporarily halted. This obligation currently impacts entities formed in 2024 that employ 20 or fewer full-time United States employees and that had sales of $5 million or less. Up until the injunction, these entities had 90 days from the date of formation to file their BOI reports. Entities formed before 2024 were given until January 1, 2025 to file.
(See our recent blog for more information about the Corporate Transparency Act and its obligations and penalties.)
The Pros and Cons of the Corporate Transparency Act
The CTA was passed on January 1, 2021 as part of the National Defense Authorization Act of 2021 and had strong bi-partisan support (the Senate vote was 81-13 in favor, while the House vote in favor was 322-87). Proponents have stated its required transparency will combat money laundering and terrorist finding by laying bare the ownership of small “shell” companies. They also noted similar legislation was already in place in the U.K. and European Union.
While the CTA’s requirements raise a number of important concerns, Judge Liles C. Burke only based his ruling on one: that CTA “transcends the limits imposed by the Constitution on the legislative branch” in its requirement that small businesses divulge significant private information about the owners of their companies.
Additional concerns raised in National Small Business Association v. Yellen, and which 420CPA also feels need to be addressed, are the CTA’s potential violation of the First Amendment (freedom of speech and association), Fourth Amendment (protection against unreasonable searches and seizures), and Fifth Amendment (safeguards against self-incrimination and due process rights).
420CPA also believes the CTA puts expensive and onerous reporting obligations on those companies least in a position to handle it: small business. Forbes recently noted an estimated reporting cost of $8,000 within the initial year.
High-Stake Vigilance: Getting Compliant, and Staying Compliant
The CTA’s additional requirement that a company continually provide updated information regarding all Beneficial Owners’ personal addresses and driver’s licenses, even down to any changes in the actual address information on those driver’s licenses, and that such information must be reported within 30 days, made it almost certain that a substantial number of companies would fall out of compliance. This would open up them and their owners to possible criminal and civil penalties, including civil penalties of up to $500 per day up to $10,000.
Moving Forward
In its recent article, Forbes noted that the District Court ruling is poised for an appeal, and that it is quite possible that the case will be decided in the Supreme Court.
While 420CPA believes it is vital that money laundering and the financing of terrorist activities be stopped, the burden of such efforts should not be allowed to fall so disproportionately on the shoulders of smaller companies. If the CTA is eventually allowed to move forward, 420CPA hopes it will do so with a significant easing of its requirements and procedures.
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