The Cost of Corporate Transparency

How will knowing who is behind every business in the U.S. going to affect Delaware?

BY JOHN L. WILLIAMS, ESQ.

THE CORPORATE TRANSPARENCY ACT, a law Congress passed as part of the Defense Authorization Act of 2019, will require over 37 million businesses in the U.S. to report detailed information about their beneficial owners and managers by January 2025. Not only that, but all new entity formations within 30 days of formation will need to file names of beneficial owners and managers plus the “applicant” name. The applicant, generally speaking, is defined as two people— both the individual who submits an order for a new company and the person at the service company who submits the filing to the state.

The Act may be of limited value in combating complex crimes because criminals will likely report false information or not report at all, but the Act will result in a tsunami upon unsophisticated small businesses—many of whom are “un-lawyered”. Besides placing a heavy administrative burden on business owners, the Act imposes harsh criminal penalties for noncompliance, including fines and jail time.

Getting full compliance from small business owners will be a considerable challenge for the Financial Crimes Enforcement Network (FinCEN), the agency tasked with generating and maintaining a registry of beneficial ownership information for every company in the country. Although some incorporation service providers may benefit from assisting with these filings, the long-term outlook for Delaware’s incorporation franchise is uncertain as the penalties and burdens will chill entrepreneurs from incorporating multiple entities or incorporating at all.

This burden will not be shared by larger businesses. Certain regulated businesses are exempt, as are businesses with more than $5 million in annual revenue and more than 20 employees. Nonprofits filed as 501(c)(3) organizations are also exempt, as are inactive businesses.

FinCEN offers guidance on how long beneficial ownership reports may take to complete. Simple businesses with one owner can expect to complete the necessary report in 90 minutes. However, for more complicated structures with multiple owners, the filing is expected to take up to 11 hours to complete. Most small businesses will lack the time and resources to comply with these requirements, making it difficult for FinCEN to process the nearly 37 million reports expected to be submitted around the deadline in January 2025.

In the past, the U.S. has had ownership information in IRS records, but that is not accessible to law enforcement. A company’s ownership information is already on record at regulated financial institutions that have a duty to know their customers. However, the Corporate Transparency Act brings the U.S. regulatory regime closer in line with international standards of the Financial Action Task Force while pushing it away from the protections set out in the Fourth Amendment. The creation of FinCEN’s beneficial ownership registry prevents banks from having to conduct expensive due diligence on customers, which is why the banking lobby pushed for its passage. Law enforcement also likes that they will not need subpoenas to obtain detailed information from service companies and banks.

Currently many small businesses struggle with the most basic filings, such as a Delaware Annual Report for corporations. The amount of education needed and the number of questions asked will be immense. FinCEN has much work to do to build the technology and staff requirements. If new business formation drops precipitously following the implementation, this tsunami would have ripple effects for future state budgets and industries that currently thrive in Delaware.

John Legare Williams, Esq. is president of The Williams Law Firm, P.A.