Why is everyone freaking out about The Corporate Transparency Act?
Maybe it's unconstitutional and if so, then so be it. But I get why it exists and I don't think people should be freaking out about it
Have you heard of the Corporate Transparency Act? Apparently, it's freaking people out.
The law was passed as part of the National Defense Authorization Act back in 2021 — before President Biden even took office. Its intention is to root out potential bad actors and terrorists who own corporate entities in the U.S.
In order to comply with the act, existing businesses and startups are required to report their "beneficial owners" (those that generally either own a significant amount of shares or exert significant influence over the operations) of the entity to the Financial Crimes Enforcement Network by the end of this year. Failure to report could result in fines as much as $10,000.
People are freaking out about it and I don’t’ understand why. Just think about it: the Small Business Administration says there are 33 million small businesses in the country. But only about 6 million employ people. The rest are independents, one-person shops and, of course, shell companies which exist in part to shield the identity of its shareholders. I’m sure most of these people are on the up-and-up. But to me it's not unreasonable for the government to want to get a little more insight into this murk, is it?
Well, for some, it's very unreasonable. So unreasonable that both the National Small Business Association (NSBA) and the Small Business Association of Michigan filed lawsuits challenging its constitutionality.
“[The act] unlawfully authorizes the search and seizure of the sensitive, personal information belonging to millions of innocent small business owners and employees without any suspicion of wrongdoing," says the Michigan group. “[It] exceeds the bounds of Congress’ legislative authority. Congress may only legislate within the specific powers granted to it in the Constitution. None of these powers give Congress the authority to enact the [act].”
Supporters of the law say that it's not only allowed under the Constitution but is necessary for security.
"The abuse of anonymously-owned companies by foreign and domestic criminals—who almost never reside in the state of incorporation—is a global problem that falls squarely within Congress' power," writes Zorka Milin, a policy director at the FACT coalition, an advocate of the ruling. "The vast majority of state attorneys general have recognized the need for congressional action."
While the Michigan suit is still in progress, the NSBA's suit so far has been successful — a federal judge struck down the law just a few weeks ago. Some business owners think that's the end of that. But not so. Because the lawsuit was not a class action it only impacts the approximately 65,000 members of the organization. The Treasury Department has vowed to carry on with the filing requirement for everyone else and is appealing the judgment.
Is the act unconstitutional? There’s plenty of debate. But that issue aside, many small business owners are upset about reporting their beneficial owners and for the usual reasons: government overreach, privacy concerns, more compliance and more costs. I'm a small business owner and I don't have these concerns. Why? Let's break it down.
Government overreach. Having this information in Nazi Germany could've made it a lot easier for Hitler to persecute his enemies, which is what worries some people today. Sure, that could certainly happen in any civilized society, even ours. But you don't think most of this data can't be gotten by government officials anyway? Company owners are frequently disclosed on tax returns, census forms, publicly-filed statements and websites. List companies, Google, OpenAI, Meta and the Dark Web likely own or can provide access to this information. I've seen enough episodes of “The Wire” and “Law & Order" to know that any good investigator can figure out the ownership of shell companies. The act just makes it easier and quicker for the government to get this information but rest assured, the information can already be found if enough effort is made.
Privacy? Yeah, that ship has sailed. You don't think your Social Security number, employer identification number, passwords, mobile phone, fingerprints and photo identification that you've shared with your financial institutions, Amazon, Google and countless other providers — not to mention the Transportation Security Administration, the IRS and other government agencies — are accessible by the people who want it? All of it is. Or at the very least can be purchased from the Russians and Chinese. Forking over your beneficial ownership data is likely adding nothing new to what is already a vast repository.
Regarding compliance, it's kind of a non-issue. Unlike more than a million businesses who have already done so, I have yet to fill out my form. But I will. And I'll be helping clients do the same. It takes less than 20 minutes. Some business owners who own multiple—dozens—of shell companies may find themselves or their accountants spending more time. But what's with all those shell companies anyway? Hmm…
Finally, there are costs, and these are minimal too. As mentioned above the time spent won't be much. And let's not forget that there are already 23 exemptions from the filing requirement ranging from companies that employ as few as 20 people to tax-exempt organizations to certain types of financial advisors and even accounting firms. A good list to check is here.
When you add up the non-issues I've listed above and then take out all the organizations that aren't even required to comply with the act and then you look at the tiny, faceless, nameless, potentially shady little shell companies that remain, you'll start to better understand why the act was passed in the first place. Maybe it's unconstitutional and if so, then so be it. But I get why it exists and I don't think people should be freaking out about it.
Gene Marks is founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.