![]()
Beneficial Ownership: Courts Strike Down The Corporate Transparency Act
The Corporate Transparency Act (CTA), enacted in 2021, mandates companies to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). On December 3, 2024, when the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (CTA). The CTA, enacted to enhance financial transparency, mandates that certain business entities report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN).
The debate surrounding beneficial ownership has led to key legal cases challenging the boundaries of transparency, privacy, and enforcement. In this case, advocacy groups argued that FinCEN’s proposed regulations under the Corporate Transparency Act were insufficiently robust to combat financial crime. They argued that overly strict requirements could stifle legitimate businesses, particularly small and medium-sized enterprises (SMEs), which lack the resources to navigate complex reporting systems.
The court’s decision in this and similar cases has underscored the importance of striking a balance between transparency and practicality. While the judiciary has generally favored the implementation of beneficial ownership laws, it has also called for safeguards to protect sensitive information and minimize unintended consequences for compliant businesses.
Small businesses expressed concern related to the proposed rule, arguing that the rule would adversely impact small or medium sized businesses on several fronts, including:
1. Compliance Burden
Small businesses often lack the resources to navigate complex regulatory requirements. For small business owners who are already managing day-to-day operations with limited staff and budgets, this adds an administrative burden. They may need to hire legal or compliance professionals to ensure proper reporting, increasing costs.
2. Risk of Penalties
Failure to comply with the beneficial ownership rule can result in steep penalties, including fines of up to $10,000 and even jail time for certain violations in the U.S. These penalties, while intended to deter bad actors, can have devastating effects on small business owners who unintentionally fail to meet requirements due to lack of knowledge or resources.
3. Overlap with Existing Rules
Many small businesses already comply with Know Your Customer (KYC) and anti-money laundering (AML) rules through their banks and financial institutions. The beneficial ownership rule creates an additional layer of reporting, which many argue is redundant.
4. Privacy Concerns
The beneficial ownership rule requires small businesses to disclose sensitive personal information about their owners, including names, addresses, and identification numbers.
5. Disproportionate Impact
Larger corporations often have complex structures, but they also have the resources to handle compliance without significant strain. In contrast, small businesses, which are often single-owner or family-run operations, may not have complex ownership structures but still face the same requirements.
6. Deterrent to Entrepreneurship
The additional paperwork and potential penalties associated with the beneficial ownership rule may discourage individuals from starting new businesses. Entrepreneurs might feel that the regulatory landscape is too cumbersome, pushing them to avoid formal business registration or seek less regulated alternatives.
7. Limited Effectiveness
Critics argue that the rule is unlikely to achieve its intended purpose of stopping financial crimes for small businesses. Illicit actors often operate through more sophisticated means or in jurisdictions that are less regulated. This leaves small businesses bearing the brunt of compliance costs, even though they pose a low risk of involvement in financial crimes.
It is expected that the incoming Trump-Vance Administration will rescind the rule and therefore halting the implementation of CTA permanently.
Meet The Author:
As Vice President for Government Relations and Public Affairs, I work to explain how actions on Capitol Hill can impact the self-employed. I love D.C. and have made my home in Capitol Hill, where I live with my husband and black Labrador, Coltrane. We love playing volleyball and softball on the National Mall.
More...