Minority business owners, who already face numerous hurdles, will now have another obstacle in their way.
At the beginning of 2025, the new federal Corporate Transparency Act will go into effect, requiring a heightened level of disclosure from small business owners. It may have a heavier impact on minority-owned firms.
“Minority-based businesses have enough hurdles trying to get capital, trying to get funding, trying to get resources so we can operate our businesses successfully,” said Viergelyn Chery-Reed, founder of psychotherapy practice GroundingHearts, in Jamaica Plain.
The new Transparency Act sets national requirements for businesses to qualify for certification. The law, passed by Congress in 2021, is part of the U.S. Treasury Department’s effort to combat money laundering. Company data will be stored in a restricted database for the Financial Crimes Enforcement Network, or FinCEN, a network of the U.S. Treasury.
Before the new law, corporate registration was handled at the state level, according to Oren Sellstrom, litigation director with Lawyers for Civil Rights, in what has been a relatively simple process of small businesses contacting their appropriate state agency and filing articles of incorporation.
Now more than 32 million small business owners nationwide will be subject to this “overreach of the federal government,” Sellstrom said, which could have serious risks for entrepreneurs of color.
The law is set to take effect on Jan. 1 and specifically targets small businesses — those with fewer than 20 employees. The law requires businesses to provide the legal name, a unique ID number and an image of one acceptable form of ID for every “beneficial owner.” Of the 32 million business owners that will be affected, thousands in Massachusetts will be swept up by the CTA.
“It was a much more easy and streamlined process at the state level, and information did not go into a massive federal database that is vulnerable, as all databases are, to breaches,” Sellstrom said.
Lawyers for Civil Rights filed a lawsuit against the U.S. Treasury on behalf of several organizations in May, asking a federal judge to strike down the CTA. Sellstrom said he expects a hearing in 2025.
Sellstrom said that entrepreneurship is critical to closing the racial wealth gap, which has been a major point of discussion in Greater Boston.
“The federal government should be helping to promote small businesses and communities of color, not enacting onerous and intrusive laws that will chill entrepreneurship,” Sellstrom said.
With the incoming Trump administration calling for mass deportations, Sellstrom said the law and the information it requires has created concern among immigrant business owners as well.
“That concern that turning over highly sensitive information to the federal government that has never been asked before of small businesses may lead to significant immigration consequences that really strike fear into the heart of immigrant entrepreneurs,” Sellstrom said.
On the surface, the law may seem like an inconsequential regulation — demanding information about a company’s owners. But for many minority business owners, this level of probing is likely to be a hindrance. And many companies may not even be aware of the new requirements, raising the risk of fines.
Failure to comply with the law comes with steep financial penalties, including fees of $500 per day or prison time.
Jeanette Velasquez, founder of Velasquez Tax & Business Services in Cambridge, is a minority business owner and represents dozens of minority entrepreneurs. She surveyed her 50 clients and found that most of them have no clue about the law and the penalties they provide.
Velasquez said she is informing her clients of the law and handling the compliance component so they can place the majority of their focus on their business. But the obstacles created by the CTA will remain, she predicts.
“To add on another compliance, in addition to tax returns, tax filings and your annual reporting, it becomes another financial burden,” Velasquez said.
For Chery-Reed, increased transparency into what happens with the data collected through the CTA would be a step in the right direction.
“There needs to be an increased oversight or a conversation around how data is going to be collected, who oversees that data and will it infringe on our constitutional rights,” Chery-Reed said.
