The United States District Court for the Eastern District of Texas issued a nationwide preliminary injunction in early December, enjoining the Corporate Transparency Act and enforcement of the reporting rule. The Texas court found that enforcement of the CTA may be unconstitutional, as it may exceed Congress’ authority.
The Corporate Transparency Act was passed in 2021 and aims to curb financial crimes, such as using LLCs as shell companies, by asking businesses operating in the U.S. to report beneficial ownership information to the U.S. Treasury’s Financial Crimes Enforcement Network, or FinCEN.
The U.S. Treasury described beneficial ownership information as “identifying information about the individuals who directly or indirectly own or control a company.”
The ruling also stays the compliance deadline, which up until recently was Jan. 1, 2025. The federal government has since filed an appeal to that ruling.
“It became a game of chicken, quite frankly,” said Sarah Webber, an associate professor of accounting at the University of Dayton.
There are multiple exceptions to the requirement, including banks, credit unions, public utilities or tax-exempt entities, and large companies and corporations already furnish similar data.
For local small businesses, concern is a prevalent sentiment, but confusion might be a more accurate description, said Jelani Johnson, Dayton Regional Director for the Minority Business Assistance Center.
“The Corporate Transparency Act is a well-intentioned initiative aimed at combating financial crime, but its implementation must account for the realities faced by small businesses,” he said.
Many businesses are unsure why this information is being collected and how it will be used, Johnson said.
“Ownership details are already a matter of public record through the Secretary of State’s office, so requiring the same information again feels redundant,” he said. “The added risk of steep penalties for noncompliance only heightens the unease.”
The consequences for not complying could be steep. If enforcement of the law goes forward through the courts, small businesses and their owners could face penalties of $500 a day, adjusted annually for inflation (right now, the penalty sits at $591). Willful violation of the requirement can result in up to $10,000 in fines and two years jail time.
Kathleen Hotmer, the owner of Pink Moon Goods, said she only knew about the requirement because her CPA had informed her.
“That (fine) would put me out of business,” Hotmer said. “And if you didn’t even know about it, it’s so unfair. If my accountant hadn’t told me, I would have never known about it.”
In October, the S-Corp Association of America found that the vast majority of America’s estimated 32 million small businesses had not filed, with some states reporting that as little as 3.2% of businesses had complied.
“We’ve seen similar issues creep up before when we look at tax legislation,” Webber said. “Maybe the government’s going to act in time. Maybe they’re not. And so we’ve had, unfortunately, this similar pattern take place.”
Accountants are uniquely positioned to inform their business clients about this new rule, but more often than not they cannot file on their clients’ behalf. That task would fall to a lawyer, which many small businesses don’t often have working relationships with, Webber said. However, business owners can also file on their own, which is the most cost-effective option.
The silver lining is that even if enforcement would resume, more than likely the federal government will give people a grace period to file these documents, Webber said.
“The advice is that we’re going to have to follow this through the court system,” she said. “Because if it does end up coming out in the government’s favor, there’s probably going to be a little bit of time to react. I don’t think the opinion would come out and then the next day, bam, everyone must file.”
“With things like this, it’s sometimes hard to understand the impact on your business one way or another,” Hotmer said. “I think most cities in the Midwest are thriving because small businesses are taking chances, and so I think anything that government can do — the federal government or the state government — can do to help small businesses and support them, is needed.”
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