Although the Corporate Transparency Act (“CTA”) became effective Jan. 1, 2024, in just two short months, its constitutionality was challenged in the U.S. District Court, Northern District of Alabama’s decision issued on March 1: National Small Business United v. Yellen.

Passed into law in 2021, the CTA, which McNees discusses in more detail here, essentially requires most small businesses to report their “beneficial ownership information” to FinCEN, the U.S. Treasury Department’s Financial Crimes Enforcement Network.

Upon FinCEN issuing final rules implementing the CTA on Sept. 29, 2022, the plaintiffs quickly filed suit six weeks later challenging the CTA’s constitutionality under the First, Fourth, Fifth, Ninth and Tenth Amendments.

The government offered three sources of constitutional authority for Congress to enact the CTA:

• The Foreign Affairs Powers — Congress has a motivating interest to curb foreign money laundering;
• Commerce Clause Authority — that the act of corporate formation itself is enough to invoke Congress’ Commerce powers; and
• Taxing power — another purpose of the FinCEN database created by the CTA is to assist in more efficient tax administration.

The court rejected each of these arguments. On March 4, 2024, FinCEN released a statement stating that it will not currently enforce the CTA against the plaintiffs of the case, including the National Small Business Association and its members as of March 1, 2024.

The Takeaway:

The only thing that can be said with certainty at present is that the government will most assuredly appeal the district court’s decision to the 11^th Circuit and the debate over the CTA’s constitutionality has yet to be resolved with any finality. As such, we recommend clients continue to comply with the CTA until a more final decision is issued from a higher court (unless they were members of the National Small Business Association as of March 1, 2024). To the extent any entities formed before Jan. 1, 2024, are grandfathered into the Dec. 31, 2024, reporting deadline, it may be prudent to wait until later in the year to file their beneficial ownership information. For newer entities formed Jan. 1, 2024, or after, clients should continue to comply with the CTA to avoid incurring any civil or criminal penalties.