Corporate Transparency Act Update: Unenforceable Against Only Certain Businesses
Background
In 2021, Congress enacted the Corporate Transparency Act (“CTA”) as part of an anti-money-laundering initiative. The CTA mandates that all entities formed or registered to do business in the US (“Reporting Companies”) and all foreign entities registered to do business in any state, unless exempt, must disclose their beneficial ownership to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
A legal challenge to the CTA and FinCEN's implementing rules arose in the case of National Small Business United v. Yellen in the US District Court of the Northern District of Alabama. On March 1, 2024, the court ruled in favor of the plaintiffs, deeming the CTA unconstitutional, stating it exceeded the constitutional limits on the legislative branch.
National Small Business United v. Yellen
In National Small Business United v. Yellen, the National Small Business Association (“NSBA”) and one of its members filed suit challenging the constitutionality of the CTA and FinCEN’s authority to implement the CTA. On March 1, 2024, the District Court ruled in favor of the plaintiffs, deeming the CTA unconstitutional, stating it exceeded the constitutional limits on the legislative branch.
The District Court dismissed the US government's arguments that Congress had the power to enact the CTA under its (1) powers to conduct foreign affairs, (2) Commerce Clause authority, or (3) taxing power, or the authority to pass laws "necessary and proper" for enumerated powers. The key issue, as highlighted by the District Court, focused on determining whether the Commerce Clause empowers Congress “to regulate non-commercial, intrastate activity when certain entities, which have availed themselves of states’ incorporation laws, use channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce.” The court ruled that Congress did not have such power under the Commerce Clause.
Effect on Businesses
Although the District Court declared the CTA unconstitutional, the injunction against enforcement applies solely to the plaintiffs, including the National Small Business Association (NSBA).
In response, FinCEN released a statement indicating it would comply with the ruling for the specific plaintiffs and a commitment not to enforce the CTA against them. The affected entities are those that were NSBA members when the court ruled on March 1, 2024. Other reporting companies remain subject to CTA requirements unless exempt.
Entities formed on or after January 1, 2024, must plan for CTA compliance, filing initial Beneficial Ownership Information (BOI) reports within 90 days if not exempt. Existing entities formed before January 1, 2024, should continue preparing for compliance by the January 1, 2025 deadline, keeping an eye on legal updates.
While the District Court's decision impacts the federal CTA, it does not affect reporting requirements under state statutes. States, including New York with the LLC Transparency Act, have introduced disclosure laws similar to the CTA, reflecting a broader landscape of regulatory developments.
Expected Future Developments
On March 11, 2024, the US Department of Justice filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit. It is expected that the DOJ will ask for a stay of the ruling during the appeals process. The outcome of similar litigation in other courts remains uncertain.
This news alert does not constitute legal advice and only contains informative content.
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