The Biggest, New Reporting Law For Business That You Probably Never Heard Of Is Ripe For Political Abuse

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by Tyler Durden
Thursday, Jan 18, 2024 - 10:40 PM

By Mark Glennon of Wirepoints

Ownership of almost all small businesses has always been private. If their stock isn’t publicly traded, most companies haven’t needed to disclose the identify of owners anywhere.

That’s over for most U.S. companies.

The Corporate Transparency Act (CTA) went into effect January 1, requiring most businesses to identify their beneficial owners (someone who owns at least 25% of the company or who has “substantial control” over it) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).And there’s certainly a high risk of political abuse.

Just yesterday, news came of evidence that the FinCen is flagging for attention transactions that include words like “MAGA” or Trump. And who trusts the federal government not to leak what are supposed to be confidential reports? Even Trumps tax returns were leaked.

The new law applies to U.S. corporations, limited liability companies and any other entities created by the filing of a document with a secretary of state or any similar office in the U.S. It also applies to companies formed under the law of a foreign country that have registered to do business in the U.S.

Exemptions are described here, but they generally are narrow. Also, the law does not apply to companies (a) with at least 20 full-time employees in the U.S.; (b) that file a U.S. federal income tax or information return showing more than $5,000,000 in U.S. gross receipts or sales for the prior fiscal year; and (c) have an operating presence at a physical office in the U.S.

It’s a dramatic change and will be a headache for many small companies. An estimated 30 million U.S. businesses will now have to file. The filed disclosures do not become public but may be used for law enforcement and national security. The law is intended to help stop and prosecute things like money laundering, tax fraud, terrorist funding and other illegal activities.

Penalties for non-compliance can be harsh. The CTA establishes civil penalties ($500 per day, up to a total of $10,000) and criminal penalties (up to two years of imprisonment) for individuals who willfully fail to file

The Illinois Secretary of State office will be taking on the task of notifying Illinois businesses about the law and developing materials to help explain it, which the Chicago Sun-Times wrote about here. Salute to both of them for that. Secretary of State Giannoulias and the state are not responsible for the new federal law in any way, so his office’s assistance will no doubt welcome to many unaware or perplexed small business owners.

The law enforcement reasoning behind the CTA is no doubt valid, but it’s also true that many law-abiding businesses and their owners have valid reasons for privacy. They won’t be happy with the new law.

Based on over thirty years earlier practicing corporate law and making venture capital investments, I can attest to many instances where privacy of ownership was important for a variety of business or personal reasons. I am not now a practicing lawyer, so please obtain your own legal advice.

The law passed in 2021 as part of related legislation with bipartisan support, overriding a veto by President Trump. It also had substantial support in the financial community and with some business groups, such as the U.S. Chamber of Commerce.

You won’t find many news reports on the CTA but plenty of good law firms have published advisories about the new law, which you can find by searching “Corporate Transparency Act.” Filing is done online at FinCEN’s website, which also links to FAQs and further information.