Complying With the Corporate Transparency Act Could Cost Thousands. Many Small Businesses Don’t Even Know What It Is

Millions of businesses face a new reporting requirement that kicks in less than a month from now.

Businesses across the nation must report their beneficial owners–those who have some form of control over a company–starting in January because of a provision that takes effect within the Corporate Transparency Act. Business owners will be required to file a form to the Financial Crimes Enforcement Network (FinCEN), which operates within the U.S. Department of the Treasury. The form, however, has yet to be released. 

The CTA, a law that was passed in January 2021, is fashioned as an anti-money laundering measure, aiming to shine a light on a corporation’s ownership structure to prevent bad actors from obfuscating their ownership positions. Take the case of the Los Zetas drug cartel, which funneled millions through a shell company associated with horse racing. While it appeared that that the cartel was managing racehorse operations, the reality was they were using the shell company as a shield for profits tied to peddling illicit drugs. 

Even though the CTA is well-intentioned, compliance experts predict that it’ll be tough for businesses to adjust to, at least initially. 

“I think it’s going to be a development for many companies, at least until they become comfortable with how it works and then what happens from there,” says Bob Lamm, the chair of securities and governance practice at Gunster, a law firm based in West Palm Beach, Florida. “The whole notion of providing beneficial ownership information is foreign to many companies.”

The government defines beneficial owners as those who have at least a 25 percent stake in a company, or those who have substantial control–directly or indirectly–over a company’s operations. A guide from the FinCEN advising small companies on how to comply with the CTA considers the following criteria when it comes to defining beneficial ownership for reporting companies:

• Any senior officers
• If someone is able to appoint or remove a senior officer
• Important decision-makers
• If someone has any other substantial control over the company

Say there’s a president at Corporation A that’s advising Small Business B. The small business would need to report the president from Corporation A as a beneficial owner.

As Lamm and others will point out, the rules get murky in defining what exactly constitutes a beneficial owner. Based on guidelines from FinCEN, one could argue that a company’s board holds considerable control. The same could be said for an entrepreneur’s parent who helps advise on key business decisions. Bottom line: It’s not purely financial positions here that are being considered.

So unless a beneficial owner contacts FinCEN themselves, the onus falls onto the business that will need to gather sensitive information from its beneficial owners and report it to the government. Information required includes a beneficial owner’s full name, birth date, social security number, and a photo of their driver’s license or another form of a state-issued ID.

So if you appeared on Shark Tank 10 years ago and received $1 million in exchange for 25 percent of your company, then you’re required to seek out information from your beneficial owner. 

The change, set to kick in on January 1, 2024, is already stirring up controversy. The National Small Business Association, a nonpartisan small-business advocacy group, sued the Treasury Department in November 2022, arguing that the CTA itself is unconstitutional because it runs askew of privacy protections and is burdensome to reporting companies. 

About half of small-business owners have no idea what the Corporate Transparency Act is, according to a survey from the Washington, D.C.-based NSBA. Another quarter of survey respondents said they were unsure if they’re required to report. The survey further finds that compliance with the law will run businesses about $8,000 on average.

Because of the law’s vagueness, the NSBA predicts that it’ll dampen small-business access to capital, along with business advisement. 

“I think it’s going to have a very chilling impact on investment,” says Molly Brogan Day, NSBA’s vice president of public affairs. “Getting help, mentorship, and advice and getting actual capital is going to be even harder than it already is for the small businesses.”

Businesses will have a year to report information surrounding their beneficial owners to the government. Failure to comply with the new law could result in fines of up to $10,000 and jail time.

If you’re looking for a way out from this new reporting requirement, you might be in luck. The silver lining is that there are 23 exemptions within the CTA. And one exemption, dubbed the large operating company provision, might be well within reach for enterprising businesses. If you employ more than 20 full-time workers within the U.S., pulled in $5 million worth of gross receipts last year, and have a physical officer somewhere within the nation, then you’d be exempt from the requirement. 

Small, private companies should take a look at the full list of exemptions to determine if they qualify for one, Lamm advises. Businesses should, for the most part, be able to figure out if they’re exempt, though that might not always be the case, he adds.

“I think you’ll see countless small-business owners running askew of FinCEN and Treasury–and any small-business owner will tell you that that’s the last place they want to be,” says the NSBA’s Day.

Corrections and amplifications: This article was clarified to acknowledge an alternative method beneficial owners have for meeting CTA requirements. Beneficial owners may provide sensitive identifying information directly to FinCEN, rather than only going through the businesses they oversee.