On March 1, 2024, Judge Liles C. Burke of the U.S. District Court for the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional in National Small Business United v. Yellen, No. 5:22-cv-1448. The plaintiffs sought an injunction to prevent the enforcement of the Corporate Transparency Act by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). They argued that the law exceeded congressional authority under Article I of the Constitution and violated the First, Fourth, and Fifth Amendments.

In its ruling, the District Court found that the Corporate Transparency Act exceeded the constitutional limits imposed on the legislative branch and lacked a clear nexus to any enumerated power, rendering it an inappropriate means of achieving congressional policy objectives. It did not reach the issue of whether the law violated any of the amendments.

Here is a summary of the court’s decision and how it might affect your business.

The Corporate Transparency Act packs a punch

Under the Corporate Transparency Act, which became effective on January 1, 2024, domestic and foreign companies registered to do business in the United States must submit beneficial ownership information reports to the Financial Crimes Enforcement Network (FinCEN). A “beneficial owner” is defined as anyone who “(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”

Judge Liles commented that “the law packs a significant regulatory punch” because “tens of millions of Americans must either disclose their personal information to FinCEN through State-registered entities, or risk years of prison time and thousands of dollars in civil and criminal fines.”

The law has merit, but it does not pass constitutional muster

Judge Liles observed that “even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution,” dismissing the government’s argument that it had the right to impose these requirements given the broad congressional power to conduct foreign affairs, regulate commerce, and exercise its taxing power under the Necessary and Proper Clause.

The judge noted the benefits of the 21-page Corporate Transparency Act, part of the 1,500-page 2021 National Defense Authorization Act. For example, the judge cited the need to prevent financial crimes often perpetrated by shell corporations—legal entities that lack “employees, customers, business, or assets.”

Despite these benefits, judge Liles found that the Corporate Transparency Act “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” Therefore, Judge Liles granted the plaintiff’s motion for summary judgment.

The impact of the ruling

Importantly, the judge limited the decision to the plaintiffs, which include the National Business Association, a nonprofit with 65,000 small businesses and entrepreneurs across the country. The government is expected to appeal. Meanwhile, a second lawsuit seeking a nationwide injunction was filed in December in the Northern District of Ohio.

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