Another Sarbanes-Oxley: Threatening Small Businesses with the “Beneficial” Ownership Bill

by Hans A. von Spakovsky and Andrew M. Grossman
Legal Memorandum #48
The Heritage Foundation
October 6, 2009

Abstract: At a time when the American economy can least afford it, entrepreneurs and small-business owners are under siege. The Incorporation Transparency and Law Enforcement Assistance Act (ITLEAA)–currently under consideration in Congress–would subject small businesses to a series of complicated and burdensome reporting requirements. These new requirements are reminiscent to those imposed by Sarbanes-Oxley, and would have similarly negative consequences: increased costs and reductions in business activity and job creation. Furthermore, the ITLEAA would do little to actually reduce the use of LLC forms for criminal activity–the purported goal of the legislation.

American entrepreneurs form approximately two million limited liability companies (LLCs) and corporations each year. The vast majority of these LLCs are small businesses, often family-run companies that will never issue regulated securities or be traded on any market. For that reason, they are exempt from the complicated and burdensome reporting requirements of laws, such as the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley), that are intended to protect unsophisticated investors buying shares in the public market. While such laws put larger American businesses at a competitive disadvantage against foreign rivals, they would simply wipe out smaller businesses that could not afford the cost of compliance.

The Incorporation Transparency and Law Enforcement Assistance Act (ITLEAA), sponsored by Senator Carl Levin (D-MI), would subject smaller and closely held businesses that are exempt from securities regulation to similarly burdensome requirements. To combat the rare use of the corporate and LLC form for criminal purposes, ITLEAA would require all new businesses taking these forms to report a variety of information concerning “beneficial ownership” at the time of their formations and forever after or face the risk of civil and criminal fines, as well as imprisonment, for errors or omissions. Further, the legislation relies on vague definitions that would provide little guidance to business owners, requiring them to hire lawyers and accountants or accept the risk of noncompliance.

By increasing the cost of business formation and maintenance, ITLEAA would reduce the number of businesses formed and cause many precarious new businesses–and in their early years, most businesses are financially precarious–to fail.

At the same time, it would provide little deterrent to criminals, who could choose other business forms that are less advantageous to those conducting legitimate businesses–such as partnerships– or simply falsify the information they are required to report. After all, individuals willing to commit major felonies like drug trafficking or money laundering will not hesitate to misreport required corporate information. At a time when the U.S. economy is even more dependent on the development of small and closely held businesses for job creation, growth, and ensuring America’s economic recovery, Congress should not erect new barriers to the success of small enterprises.

Continues at The Heritage Foundation.

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