Debunk CTA Misconceptions: Introduction

The Corporate Transparency Act (CTA), enacted January 1 of 2021, marked a significant shift in the legal landscape for businesses in the United States. Intended to target illicit activities often facilitated by opaque corporate structures, the Act aimed to end the use of “shell” companies in money laundering, terrorist financing, and fraudulent practices. However, misconceptions about its scope, impact on small businesses, constitutionality, and potential consequences persist among business owners. With the CTA comes the Beneficial Ownership Information (BOI) reporting rule, which needs to be on the radar for professionals and business owners in the United States.

Small Business Exemption

Many small business owners assume they are exempt from the CTA’s purview. However, the Act casts a broad net and specifically includes small businesses to prevent criminals from hiding behind corporate veils. Compliance is essential unless the business qualifies for an exemption (for example, certain large businesses are exempt). There are 23 types of entities that are exempt from filing a BOI report (BOIR). To put this in perspective, of all existing entities in 2024, 88.9% of them are not exempt and will need to file a BOIR.

Influence of Industry Lobbyists

Some believed industry lobbyists would prevent the Act’s passage. However, despite historical attempts to block similar legislation, the CTA was passed, showcasing bipartisan support and a commitment to combatting illicit activities. There have been proposed rulings to extend deadlines and requests to clarify certain definitions, but make no mistake, the CTA is finalized and effective.

Constitutional Concerns

Questions about the Act’s constitutionality persist. There has been one major lawsuit filed against the Treasury.

Filed on November 15, 2022, in the U.S. District Court for the Northern District of Alabama, the National Small Business Association (NSBA) lawsuit argues that this new regulation disproportionately burdens small enterprises, infringes on constitutional rights such as the right to privacy, association, and free speech, and encroaches upon states’ authority over business governance. There hasn’t been any recent news about the complaint since it was filed, but with the CTA effective today, it’s still uncertain what will come of the lawsuit.

Ignoring Reporting Obligations

Some business owners contemplate non-compliance. However, overlooking reporting obligations could lead to significant repercussions, including fines of up to $10,000 per violation, criminal penalties, and even imprisonment.

Disregard for Fiduciary Duties

Business owners with substantial control over reporting entities must understand their fiduciary duties. Failure to comply can breach these duties, leading to legal repercussions, potential personal liabilities, and even criminal sentences. Those who meet the definition of a beneficial owner (even individuals with no financial stake in the entity can fall under the CTAs definition of a beneficial owner), must be reported on a reporting company’s BOIR. If you know that you will need to be reported on a BOIR, now’s the time to talk to your senior officers and/or management to ensure filing is completed.

The Road Ahead

Despite initial shockwaves, the CTA is a reality that demands attention. With its implementation deadline passed, businesses need to prepare for compliance. Waiting for clearer guidelines from FinCEN is not a viable strategy. Each entity must take steps to comply with reporting requirements. The CTA has disrupted traditional norms in beneficial owner reporting and its enforcement mechanisms will leave no room for evasion. Secure Compliance can provide you with the tools you need to file your BOIR efficiently and quickly. Whether you’re a CPA, lawyer, or business owner, there is a platform tailored just for you.

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