The Corporate Transparency Act (the CTA), which became effective on January 1, 2024, was ruled unconstitutional by the U.S. District Court for the Northern District of Alabama (District Court), in the case styled National Small Business Association v. Yellen.

The effects of this decision on parties other than the plaintiffs are yet to be determined. Therefore, it’s advisable for reporting entities to follow the CTA’s reporting deadlines and requirements until clearer guidance emerges. Noncompliance could result in civil or criminal penalties, so it’s essential to provide timely and complete reporting.

Background of Challenges to the Corporate Transparency Act

The CTA aims to enhance transparency and limit fraudulent activity by requiring certain reporting companies to disclose their beneficial owners to the Financial Crimes Enforcement Network aka FinCEN. Proponents of the CTA argue the legislation falls within Congress’ authority under the U.S. Constitution to regulate foreign affairs and interstate commerce and to impose taxes. On the other hand, critics argue that the CTA unfairly burdens small businesses (who are the most likely group to face CTA compliance issues), by requiring them to share sensitive, personal information about their owners and by forcing them to incur substantial compliance expenditures.

Court Decision and Reasoning

In a 53-page ruling issued on March 1, 2024, the District Court held the CTA unconstitutional on the grounds that it “exceeds the Constitution’s limits on the legislative branch.” The District Court determined that the CTA’s disclosure requirements improperly apply to entities conducting purely intrastate commercial activities or no commercial activities at all, rather than only those entities engaging in interstate commerce. The ruling also held that the requirement to report beneficial ownership information under the CTA was not a proper exercise of Congress’ power to regulate foreign affairs or its taxing power. The District Court further noted that the CTA intrudes on the powers traditionally held by state governments regarding corporate formation.

Impact on Corporate Transparency Efforts

Although this ruling only suspends enforcement of the CTA against the plaintiffs, the National Small Business Association has over 65,000 members, which means that the District Court’s injunction is more far reaching than initially thought. Moreover, there are likely many more challenges to the CTA that will come before other federal courts. The intention behind the CTA may be to combat illicit financial activities, but the District Court’s decision highlights complex legal and ethical considerations surrounding efforts to enhance transparency in corporate ownership while balancing individual privacy rights.

What Should You Do Now?

The U.S. government is expected to quickly appeal the ruling, and such appeal may ultimately end up at the Supreme Court. In the meantime, it remains to be seen how this decision will impact others beyond the plaintiffs in this case, so reporting companies should continue to abide by the requirements and timeframes for reporting set forth in the CTA until additional guidance is available, especially given that noncompliance could potentially result in civil or criminal penalties.