(This column originally appeared in the Inquirer)
If you run a small business, you’ve probably been hearing about new filing requirements under the Corporate Transparency Act. But that law is now in limbo, which is raising additional questions about what businesses should do.
The act became law in 2021 as part of the National Defense Authorization Act. It requires many businesses — particularly smaller businesses — to report certain details about their “beneficial owners” to the U.S. Treasury Department by Dec. 31 or face a fine of up to $10,000 per reporting entity. This includes anyone who owns at least 25% of the entity through profit interest, options, warrants, and other instruments.
Other senior managers with “substantial control” over company decisions may also need to be included. Businesses may also need to report their legal and trade names (or “doing business as” name), street address, the state where the entity was formed, and relevant tax and employer identification numbers.
But now everything’s on hold.
Earlier this month the U.S. District Court for the Eastern District of Texas issued a preliminary injunction suspending the enforcement of the act because the reporting requirements “exceed Congress’s power, and violate First and Fourth Amendment protections.” Enforcement of the act is halted nationwide, and for now, businesses are no longer required to meet the Jan. 1 filing deadline.
Immediately following the court’s decision, the government announced its intention to appeal. With the Jan. 1 deadline looming, most experts are taking a wait-and-see attitude.
“It’s unclear whether things will be finalized before the Dec. 31 deadline,” said Alex J. Phinn III, an attorney with Pritchard Law in Colmar, Pa. “If it is not, then the deadline to file will most likely be extended; however, I cannot say for certain.”
Mark Limardo, a partner in the tax department with New York law firm Herrick, says that “as a pure legal matter,” the decision clearly renders the act universally unenforceable as long as the preliminary injunction remains in place.
If the government’s appeal is successful, Limardo said, “a company that stopped working on its compliance may be unable to restart and finish in time to meet the Jan. 1 filing deadline,” he said. But, he added, the appeals court or government could choose to grant a grace period because of the injunction.
So what should a business owner do?
Phinn is recommending two options to his clients who have not filed yet: go ahead and file, or wait for the appeals process to finish.
“The benefit of waiting is that if the ruling is kept by the higher courts, then you will have never given the government any of your information,” he said. “The con is that if the ruling is overruled, there may be a mad dash at some point soon to file everything.”
Limardo said a company should consider continuing its compliance, up to and just short of any filing.
“This way, if the injunction is lifted without any grace period, the company should be well-positioned to meet a short filing deadline,” he said.
Guidance from the Treasury Department says “reporting companies are not currently required to file beneficial ownership information with [Financial Crimes Enforcement Network] and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”
As for me, I already reported this information about my company. It was an easy process and took just a few minutes. Although I certainly understand why some would have hesitations, the bottom line is that the information I’m required to report is already pretty accessible.
