The Corporate Transparency Act (CTA)’s Impact on Small Business

Starting on January 1, 2024, the Corporate Transparency Act (CTA) would impose new reporting requirements on certain small businesses (specifically corporations and limited liability companies with twenty or fewer employees).  The legislation will require companies to disclose their beneficial owners to prevent bad actors from using shell companies to break the law or hide illicit activity.

The CTA was enacted in 2020 with the stated goal of combatting money laundering, terrorist financing, and other illicit activities. The statute requires the submission of regular reports to the federal government that include “personal identifiers” of the owners and senior employees and/or advisors of covered entities.

The CTA applies only to businesses with under $5 million in annual revenues and fewer than 20 employees. The Treasury Department estimates the CTA will cover over 32 million existing entities and an additional 5 million newly created entities every year. These companies and other legal entities will likely be subjected to increased paperwork, privacy risks, and potentially devastating fines and prison terms.

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is still crafting their implementation and administrative responsibilities regarding CTA’s enforcement. To date, the agency is behind in promulgating the key rules necessary to implement the CTA and despite a looming effective date of January 1, 2024, federal regulators have yet to finalize the “Access Rule,” which specifies who can access the database and for what purposes, as well as an updated “Customer Due Diligence Rule” which applies to financial institutions.

House Financial Services Chairman McHenry (R-SC) has introduced the Protecting Small Business Information Act, which would delay the CTA’s effective date.  By delaying the reporting requirements from taking effect until Treasury finalizes its rulemaking process, this legislation would provide the certainty needed to comply with the new statute, along with giving Congress more time to rethink this whole approach.