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Corporate Transparency Act Faces Legal Challenge

March 12, 2024

by Ellen Long & Michael Radin

The Corporate Transparency Act (CTA) that went into effect on January 1, 2024 is already facing pushback. Only two months after the Act went into effect, a federal district court in Alabama declared the Act “unconstitutional because it cannot be justified as exercising Congress’s enumerated powers.” For a deeper dive into the CTA’s origin and requirements, please see Richard P. Breed, IV’s article, Corporate Transparency Act Overview. The below summary gives some information on the Alabama case and its practical implications for the Act.

The CTA was passed by Congress to combat financial crimes such as money laundering. To increase transparency, the CTA imposes new disclosure requirements of the Beneficial Owners of non-exempt businesses, which includes most small businesses. Required disclosures include information such as the Beneficial’s Owner’s full legal name, date of birth, home address, and copies of identifying documents. It is estimated that the CTA applies to roughly 32.6 million currently existing entities. [1]

Case Summary

In National Small Business United d/b/a the National Small Business Association v. Yellen, a nonprofit small business trade group that “represents and protects the rights of small businesses across the United States” challenged the constitutionality of the CTA, asserting that its disclosure requirements are an overreach and Congress did not have the power to create it. The Government responded with three sources of constitutional authority, including Congress’ foreign affairs powers, its Commerce Clause authority, and the necessary and proper clause. The Alabama trial court rejected all three arguments, recognizing that, while the Government’s intentions behind the CTA seek “sensible” and “praiseworthy” goals, the Act ultimately violates the Constitution. The court granted summary judgment in favor of the Plaintiffs. [1]  An appeal by the government is widely expected.

Practical Implications of this Ruling

What does this mean for businesses affected by the CTA who are unsure about completing their CTA filings? Our recommendation is that non-exempt businesses should continue to file. First, as of March 4, 2024, FinCEN issued a notice stating that it will not enforce the reporting requirements against the Plaintiffs in the case, as long as the court order remains in effect.[2]   In other words, FInCEN sees this as a narrow ruling – only the Plaintiffs named in the case are “off the hook.” There is no national injunction that excuses all Beneficial Owners from their reporting duties. The American Institute of Certified Public Accountants has released a statement advising small businesses to continue to file BOI reports.[3]  Second, as discussed in greater detail in the Corporate Transparency Act Overview, there are harsh penalties for non-compliance, including civil penalties of up to $500 per day that the required disclosure is filed late, and potential criminal penalties for anyone that willfully provides or attempts to provide false or fraudulent Beneficial Ownership Information (“BOI”).

To avoid consequences existing businesses should continue to complete their BOI reporting requirements, and new entities formed after January 1, 2024 should complete their BOI reporting requirements within the 90-day window prescribed in the CTA. Keep in mind that entities formed prior to January 1, 2024 still have until January 1, 2025 to complete their BOI reporting requirements.