The decision of the Federal District Court for the Northern District of Alabama in the case of National Small Business United v. Yellen, announced on Friday, March 1, 2024, has created uncertainty for both reporting companies and their attorneys under the Corporate Transparency Act (“CTA”). 

What You Need to Know:

• On March 1, 2024, U.S. District Court Judge Liles Burke (N.D. Ala.) issued an opinion concluding Congress’ enactment of the CTA exceeded its authority under the U.S. Constitution.
• Judge Burke’s decision has resulted in uncertainty for millions of business owners who own entities subject to the CTA’s reporting requirements.

The Court in Yellen ruled that the CTA is unconstitutional because it exceeds Congress’ power to regulate commerce. The Court found that while the Commerce Clause of the Constitution grants Congress the broad power to regulate commerce among the states, that authority does not extend to substantive regulation of business formation, which the Court deemed a “non-commercial, intrastate activity.” The Court, therefore, enjoined the Financial Crimes Enforcement Network of the Department of Treasury (“FinCEN”) from enforcing the CTA against the plaintiffs in Yellen. 

The ruling states that it applies only to the plaintiffs in Yellen and that it is not a nationwide injunction against the enforcement of the CTA. Nevertheless, the ruling casts doubt on the obligations under the CTA of all other companies that qualify as “reporting companies” since all of those other companies are similarly situated to the plaintiffs in Yellen. That is, the facts and law that apply to them are indistinguishable from the facts and law applicable to the Yellen plaintiffs.

It is anticipated that Yellen will be appealed to the 11th Circuit Court of Appeals and, from there, regardless of the outcome, to the U.S. Supreme Court, which is likely to be a lengthy process, certainly extending well beyond the 90-day reporting deadline for companies organized on or after January 1, 2024, and even the January 1, 2025 reporting deadline for companies organized before January 1, 2024.

It is not known at this time whether, in the interim, FinCEN will issue any guidance or whether Congress will step in to give direction. Thus, in the meantime, reporting companies that remain subject to the CTA and their counsel are left in a quandary – report beneficial ownership in accordance with existing CTA deadlines or, delay filing until resolution of Yellen or further guidance from FinCEN? 

For companies organized before January 1, 2024, approximately 10 months remain for them to file their beneficial ownership reports (if they have not already done so). Thus, these companies do not face the pressure of having to make an immediate decision. 

On the other hand, entities formed on or after January 1, 2024, remain subject to the CTA’s 90-day filing deadline for initial reports, and its 30-day deadline for updated reports.

Because filing is a relatively simple ministerial act once beneficial ownership has been determined, and the consequences of noncompliance include serious civil and criminal penalties, the consensus among counsel appears to be that these entities should proceed with filing notwithstanding that it may subsequently be found that the CTA is unconstitutional.