Law requiring business registration temporarily on hold

A law that potentially affects over a hundred thousand Connecticut small businesses and requires them to file ownership information with the federal government has been temporarily put on hold.

Passed in 2021 as part of the federal National Defense Authorization Act, the Corporate Transparency Act (CTA) requires most companies with fewer than 20 employees to file stakeholder information, or information about who owns or controls them, with the Financial Crimes Enforcement Network (FinCEN) within the U.S. Department of the Treasury.

Enforcement of the law began on January 1 of this year. The law is intended to “curb illicit finance” and applies to most businesses that have to file registration paperwork with a secretary of state’s offices, with some exemptions for entities like financial institutions and non-profits.

But the law carries hefty financial price tags, both for businesses that comply and those that fail to do so, and has been the subject of several lawsuits alleging it is unconstitutional.

In a notice in the Federal Register posted in January 2023, FinCEN estimated 32,556,929 businesses would have to submit Beneficial Ownership Information (BOI) in the first year of the law and that approximately 5 million would be filed in subsequent years, as well as approximately 14.4 million updated BOIs. It also estimated completing initial BOI information could take anywhere from 90 minutes for companies with simple structures to 650 minutes for companies with complex structures.

Its estimated total cost to businesses for the first year of reporting was $2.17 billion for the first year the law was in effect and $425.6 million to $13.1 billion annually.

Failing to comply is equally costly. Civil fines range from $500 a day for each day information is not filed. However, that amount is adjusted for inflation. As of April 18, 2024, when FinCEN posted information about penalties associated with the law, the actual per-day cost of a penalty was $591. Additionally, businesses that don’t comply with the law could face criminal penalties, including up to two years in prison and a fine of up to $10,000.

But enforcement of the CTA was temporarily put on hold earlier in December when a federal judge in the U.S. District Court for the Eastern District of Texas issued a national injunction pausing enforcement of the law. The injunction came from a lawsuit brought by the Center for Individual Rights and the National Federation of Independent Businesses.

“Though seemingly benign, this federal mandate marks a drastic two-fold departure from history.” the decision states. “First, it represents a Federal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several States. Second, the CTA ends a feature of corporate formation as designed by various States—anonymity.”

The ruling further found that the federal government was unable to provide “any tenable theory” that Congress had the power to enact the CTA and found the law “appears likely unconstitutional.”

The CTA was also ruled unconstitutional by a federal judge in Alabama in March. That suit was brought by the National Small Business Association (NSBA) and it resulted enforcement of the law being forbidden against NSBA members. An appeal of that finding is currently before the U.S. Court of Appeals for the Eleventh Circuit.

Though the law was ostensibly created to combat financial crimes, the reporting requirements have created an opportunity for scammers. FinCEN has warned businesses of fraudulent scams targeting businesses that have to comply with the CTA, including scams that reference forms that do not exist, correspondence requesting payment for filing BOI, and phone calls or emails about penalties for violating the law. It has also flagged at least one fraudulent website claiming to be an authorized service provider for FinCEN.

According to Chris Davis, vice president of public policy for the Connecticut Business and Industry Association (CBIA), about 123,000 small businesses would be affected by the law.

“Right now, we see the injunction as a positive thing for small businesses that were afraid of not being able to comply on time.” Davis told Inside Investigator.

He added CBIA hopes the federal government will take the opportunity re-examine the need for small businesses to file BOIs.

In a press release on the ruling, CBIA advised companies that must file BOIs under the law to “seek legal counsel regarding compliance with the CTA, including consideration of confidentiality obligations if the choice is made to file with FinCEN while the injunction is in place.”

Inside Investigator reached out to the Connecticut chapter of NFIB for comment but did not receive a response.