The U.S. Treasury Department has issued a final rule that would create a new database containing personal ownership information that an estimated 32 million small businesses must submit.
The rule’s intended to make it “harder for criminals, organized crime rings, and other illicit actors to hide their identities and launder their money through the financial system,” according to Treasury.
But some experts say the rule, which requires additional guidance, may be burdensome and costly to legitimate small businesses.
“The overall spirit of the rule was something we agreed with, but we also wanted to do it in a way that minimizes the burden of small businesses,” says Will Gardner, a Washington-based director of policy at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness.
In January 2021, Congress passed the Corporate Transparency Act, which aimed to improve anti-money laundering enforcement in the U.S., he says. The legislation directs the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to create a new federal database requiring certain businesses to report their beneficial owners and the company applicants of the entity, says Gardner, who provides more insight at https://tinyurl.com/yyjw4msa. See https://tinyurl.com/5y5hbmcc for beneficial owner and applicant definitions.
Among those exempt, according to Bernadette Kasnicki, counsel at Rivkin Radler in Uniondale, are entities that:
- employ more than 20 full time employees in the United States, and
- have an operating presence at a physical office in the United States, and
- have filed a federal income tax or information return for the previous year showing more than $5 million in gross receipts or sales excluding gross receipts or sales from sources outside of the United States.
So this rule would impact mainly small firms like corporations, LLC’s and limited partnerships with fewer than 20 employees, she says. Kasnicki goes into greater depth at https://tinyurl.com/ruwyjvrj.
This can be an onus for those smaller firms because of the cost and time needed to fulfill the requirement’s of the rule, which goes into effect Jan. 1, 2024, Gardner says.
Treasury officials said the cost for most businesses with simple ownership structures should be nominal — around $85 per business to submit an initial report. That estimate reflects the value of the time by the company to supply necessary documentation and information.
Gardner is among experts questioning whether that modest estimate is completely accurate, noting, some firms may have to hire professionals for help in preparing the report.
Christine Malafi, senior partner and chair of the corporate department at Campolo, Middleton & McCormick LLP in Ronkonkoma, agrees, noting, “a lot of small businesses do not have their corporate books in order.”
And while “the purpose of the rule is laudable, I’m not sure the people who are intent on laundering money through a front company are going to report that they are involved in the companies,” she says.
Malafi also expressed concern over the security of the information being submitted, which includes the beneficial owner’s name, birthdate, address and a unique identifying number from a document such as a passport or license.
The new BOSS
According to Treasury officials, though, the information will be uploaded into a secure online portal, the Beneficial Ownership Secure System (BOSS), which Treasury is building now.
FinCEN will develop compliance and guidance documents to assist reporting companies in complying with this rule. Existing companies will have until Jan. 1, 2025 to file their initial reports, Malafi says.
Companies created or registered after Jan. 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.
Treasury officials expect more guidance to be released throughout the year as they get input from small businesses regarding what would be most useful.
Still, Ed McWilliams, a partner at Bohemia-based Cerini & Associates, a CPA and business advisory firm, predicted, “I’m anticipating during 2024 we will be assisting a lot of clients during this process.”
Although, he pointed out, most businesses probably would have had to gather this information in “one form or another” to open a bank account at a financial institution.
For instance, when he forms LLCs for clients, in order to open a bank account for the entity, he has to provide the bank with a signed operating agreement, which lists the owners of the entity, he says.
And, McWilliams said, several other countries already have similar databases including Australia and the United Kingdom
While more information has yet to come out, businesses should start thinking about their ownership structures and necessary documentation, Kasnicki says.
Particularly, businesses with complex beneficial ownership structures "should think about what names they'll have to disclose — and do we have this information?” she says.
As of the first quarter of 2022, 90.5% of New York’s private industry employers had less than 20 employees, according to the Bureau of Labor Statistics Quarterly Census of Employment and Wages. According to the New York State Department of Labor data, as of 2021, there were more than 73,000 businesses on Long Island with fewer than 20 employees.
Sources: U.S. Bureau of Labor Statistics and New York State Department of Labor.