The Corporate Transparency Act, or H.R. 2513, which passed in the House in late October, will soon be considered in the Senate. The bill, which aims to prevent criminal activity such as money laundering, would require corporations and LLCs with less than 20 employees or $5 million in revenue to turn over sensitive personal information to the U.S. Treasury Department.
We spoke with Scott Anderson, an Audit Partner and accounting expert at Northern California accounting and consulting firm Sensiba San Filippo, about the pros and cons of the bill and its potential impact on small businesses.
Q: What is the purpose of this bill and why is it relevant in 2019?
A: H.R. 2513 was drafted with the intent of preventing criminals from exploiting the ease with which corporations can be created in the United States. Currently, forming a corporation in most states does not require much, if any, information regarding the parties benefiting from said corporation. Unfortunately, it seems some criminals and criminal organizations have been able to utilize “shell” corporations, which have little to no real business activity, to conduct tax evasion schemes and money laundering. The bill aims to make it harder for shareholders and other beneficiaries (“beneficial owners”) to remain anonymous by providing FinCEN with personal information regarding the beneficial owners of all U.S. corporations and LLCs.
Q: What is FinCEN and will personal information be safe in their hands?
A: Financial Crimes Enforcement Network (“FinCEN”) was established in 1990 as a bureau of the U.S. Department of the Treasury to combat money laundering, terrorist financing, and other financial crimes. One of the potential issues with the proposed bill (H.R. 2513) is that it does not specify the process with which local law enforcement departments around the country will follow to obtain personal information of beneficial owners. The proposed bill, simply cites “through appropriate protocols”, which is vague and causes concern. While the lack of specifics may be well intentioned to help to keep personal information confidential, it could also be that the drafters of the bill haven’t contemplated the actual protocols. In either case, there is cause for concern regarding the privacy of collected information and how FinCEN will prevent criminals from breaching this information either electronically or by impersonating the local law enforcement agencies.
Q: Who will be impacted most by this Act?
A: Because the bill’s specific requirements differ between different types and sizes of corporations, small businesses (especially those with under 20 employees or under $5 million in annual revenues) will feel the brunt of the impact of this Act. Although the Act is intended to target criminals, the unintended consequence is that legitimate small businesses are subjected to significant additional filing requirements. For these smaller business, not only will they have to provide personal information of owners when first applying as a corporation, they will also have ongoing annual filing requirements to report either that there have been no changes or to include the personal information of the corporations newly added beneficial owners.
Q: What are small businesses actually going to have to do and what are the consequences of non-compliance?
A: Regardless of state of incorporation, all new and most existing LLC/S-corps will have to provide FinCEN the name, date of birth, current address, and a form of U.S. government issued identification for all beneficial owners of the company. This information is required for anyone with significant ownership (25 percent or more), substantial control over the company, or who receives substantial benefits from the assets of the company. Ongoing annual filings to FinCEN are required, and willfully failing to comply can result in fines up to $10,000 or up to 3 years in prison. Even exempt companies that do not have to conduct this annual filing, such as banks, insurance companies, or companies exceeding 20 full-time employees and $5 million gross revenues, will have to file information with FinCEN to report their eligibility for exemption for annual filings. Essentially, all corporations are going to be impacted, but small businesses are impacted the most because of these ongoing annual filing requirements.
Q: Isn’t the potential decrease in financial crimes worth this effort?
A: It is a common sentiment that the criminals who are currently using “shell” corporations to conduct their illegal activities are not likely to comply with the Act, as this is just another law that they would be breaking. Criminals are likely to find ways to circumvent this Act’s requirements or will report fraudulent information. This isn’t to say that regulators should give up fighting financial crimes, but the burden of this bill to small businesses is significant and seems to outweigh the obvious benefits to our communities.
Scott Anderson has more than 10 years of audit and accounting experience assisting private, owner-operated companies with financial reporting and tax compliance. He works closely with clients in manufacturing, construction, renewable energy and other industries, helping alternative energy clients to receive millions of dollars in payments in lieu of tax credits. A licensed CPA, Scott holds a Bachelor’s in Business, Economics and Accounting from the University of California, Santa Barbara, and has been named to the Silicon Valley Business Journal’s 40 Under 40.