Small businesses in the United States have been given a temporary break from the Treasury Department’s reporting requirement due to a court decision suspending the enforcement of the Corporate Transparency Act. This is aimed at curbing financial crimes, whereby a small business would have to declare the identity of anyone having significant control or ownership in the business. The plight becomes very temporary even though there is a definite breathing space for the businesses as the legal tussle unfolds.
Court delays enforcement of beneficial ownership reporting
The Corporate Transparency Act makes powerful moves in achieving the financial transparency goals to ensure that millions of small businesses file “beneficial ownership information” (BOI) reports with the Financial Crimes Enforcement Network, department of the U.S. Treasury, as a failsafe line of defense against being used by criminals to create shell companies for illegal activities through complex ownership structures.
The BOI reporting rules were supposed to take effect on January 13, 2025, but they were stayed by an order of the 5th U.S. Circuit Court of Appeals. On December 26, the court imposed the injunction, stating that it needed to look at “weighty substantive arguments.” Oral arguments are scheduled on March 25, 2025, and thus the injunction will most probably remain in effect until at least that date.
In the meantime, businesses will not report BOI, and no penalties will be enforced against them for non-reporting as long as the injunction is active. Previously, violations of the rule would have seen businesses face civil penalties of $591 per day, criminal fines of up to $10,000, and even imprisonment for as many as two years.
FinCEN notes that while companies are free to file BOI reports, the enforcement and liability apply suspension. However, this legal tussle has created much confusion and uncertainty for small businesses.
Whiplash for small businesses as deadlines shift
Legal turbulence has punctuated the journey to enforce the rules relating to BOI reporting. A federal court in Texas issued a temporary block on Treasury enforcement of the rules, making them effective on January 1, 2025, as of December 3, 2024. Just weeks later, however, on December 23, a motions panel of the 5th Circuit lifted that injunction, only for a different panel of the same court to reinstate it three days later.
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Frequent changes have thrown small business owners into a state of uncertainty about their compliance obligations. “The long and short of it is that no one needs to file a BOI report unless and until the injunction is lifted,” said Daniel Stipano, partner at law firm Davis Polk & Wardwell, via email.
About 32.6 million businesses, including corporations, limited liability companies, small corporations, and other entities, are subject to the regulation. Certain businesses will be free of the requirement—the exemption applies to those with gross annual sales of over $5 million and more than 20 full-time employees.
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For now, small business owners could catch their breath and watch out for events as they unfold legally. According to FinCEN, updates will be issued to businesses regarding the changes. However, for now, more uncertainty just adds to the messiness that is already present in the regulatory environment.
Conclusion: uncertainty persists
The postponed enforcement of the BOI reporting rules has sparked renewed contention in the regulatory burden versus small business administrative burden debate. Even though the CTA is directed at curbing financial crime, its regulatory implementation has undergone rough legal procedures.
Small businesses need to keep abreast of developments in this litigation since the outcome will affect millions of companies across the country. Meanwhile, there is nothing pending on businesses, but lawyers advise close monitoring of soon-to-come updates from FinCEN and beginning to prepare for compliance when required.
