On March 1, 2024, the U.S. District Court for the Northern District of Alabama, Northeastern Division published an opinion finding that the Corporate Transparency Act (the “CTA”) is unconstitutional as exceeding the U.S. Constitution’s limits on Congress’ power. Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. 2024). This decision, while limited in scope and likely to be appealed, puts the CTA in jeopardy and creates uncertainty regarding actions reporting companies should take vis à vis the CTA while the case moves through the appellate process.

As a brief refresher, under the CTA, “reporting companies” formed before January 1, 2024 have to file a Beneficial Ownership Information report (a “BOI report”) with FinCEN by January 1, 2025, providing certain information about its “beneficial owners.” A reporting company formed after January 1, 2024 has 90 days from formation to file its BOI report. A reporting company is any legal entity that has filed its formation document (e.g., certificate of incorporation, articles of organization, limited partnership agreement, etc.) with a United States state or territory filing office. A beneficial owner is an individual who (1) directly or indirectly owns or controls 25% or more of the reporting company’s interests on a fully diluted basis or (2) has substantial control over the reporting company. If a person meets either prong of the test, they are a beneficial owner.

The penalties for noncompliance are civil fines of not more than $500 per day the violation continues or criminal penalties, including imprisonment for not more than two years and/or a fine of up to $10,000. For more information on the CTA, please reference our Client Alert from December: Corporate Transparency Act Brings Changes for Reporting Companies in 2024 (ubglaw.com).

As mentioned, the federal government is likely to appeal the Alabama district court’s decision, which means that while the decision is binding for now, the issue is not settled. Further, for the time being, the district court’s decision is limited to a finding that the CTA may not be enforced against the plaintiffs who were party to the action, which means that other non-exempt reporting companies may still need to comply with the CTA.

Key Takeaways and Recommendations

The recent district court’s decision is limited in scope and is likely to be appealed, which means that compliance under the CTA may still be required. Given the penalties for noncompliance, we recommend that reporting companies formed in 2024 continue to file BOI reports within 90 days of their formation despite the legal uncertainty of the CTA. We further recommend that reporting companies formed before 2024 consider deferring their filings until further guidance is available but should continue to gather the necessary information to complete their BOI reports so that such reports are ready to be filed before January 1, 2025.

We will continue to closely monitor the CTA and provide further guidance and updates as necessary.