An Unclear Future for the Corporate Transparency Act, Recently Found Unconstitutional

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Transparency

On March 1, 2024, the U.S. District Court for the Northern District of Alabama declared the recently enacted Corporate Transparency Act (the “CTA”) unconstitutional. As a result of this decision, the federal government has suspended its enforcement of the CTA’s requirements of the plaintiffs, but all other businesses must ensure they continue to comply with the CTA’s reporting requirements.

The CTA requires all businesses formed in the United States (and foreign businesses operating in the U.S.) to report information about the company’s owners to the federal government. Specifically, this data must be shared with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), the agency responsible for upholding national security as it relates to financial matters. The requirements posed by the CTA are the first and only attempt by the federal government to formally track all registered businesses and their owners, marking a major compliance obligation for entities.

The case at hand, brought by the National Small Business Association (“NSBA”), alleges that Congress lacked the requisite authority under Article I of the Constitution to enact CTA’s mandatory disclosure requirements. The plaintiffs also allege that the disclosure requirements violate the First, Fourth, Fifth, Ninth, and Tenth Amendments. These requirements are the heart of the CTA and the sole purpose for which it was enacted.

The Court found that the plaintiffs had standing to bring the action and that the requirements posed by the CTA were impermissible under Congress’s power, pursuant to its foreign affairs and national security powers. The Court also concluded that the CTA does not fall under Congress’s Commerce Clause authority and that the government did not act pursuant to the Necessary and Proper clause of the Constitution. The district court granted plaintiffs’ Motion for Summary Judgment, finding that the CTA’s requirements were unconstitutional and exceeded constitutional limits of the government’s power. The Court entered a permanent injunction against the government from enforcing the CTA against the plaintiffs.

In a press release dated March 4, 2024 and updated March 11, 2024, FinCen noted that it will comply with the court order and will not enforce the CTA’s requirements against the plaintiffs. FinCen noted, however, that other than the “particular individuals and entities subject to the court’s injunction,” reporting companies are still required to comply with the Act and file the necessary beneficial ownership reports. Therefore, all entities—except for the plaintiffs in the NSBA litigation—must still comply with the requirements of the Act.

It remains to be seen how the NSBA case will affect the CTA’s impact on all other entities, though it is likely similar lawsuits will emerge throughout the country in the near future, potentially exacerbating the lack of clarity around an Act that was meant to increase transparency.

Read our previous coverage on the CTA here.