IN National Small Business United, d/b/a National Small Business Association, et al. c. Janet Yellen, et al.Case No. 5:22-cv-01448-LCB (ND Ala.), appThe Federal Court recently ruled that the Corporate Transparency Act (CTA) is unconstitutional. In a lengthy opinion issued March 1, the U.S. District Court for the Northern District of Alabama explained that the CTA may be a “clever law” that pursues “reasonable and laudable goals,” but it violates the U.S. Constitution .
The Court held that the CTA was not authorized either by the foreign affairs or taxation powers of Congress, nor by its powers under the Commerce Clause or under the Necessary and Proper Clause.
CTA requirements
The CTA is a far-reaching federal law that went into effect on January 1. The CTA requires many companies (called “reporting companies”) to disclose information about individuals who, directly or indirectly, exercise significant control over them or own or control at least 25% of the ownership interests in them (called “beneficial owners “), as well as for some so-called “company applicants”, in the Financial Crimes Enforcement Network. FinCEN is an office of the US Treasury Department that collects and analyzes information to combat money laundering, terrorist financing and other financial crimes.
The decision of the Court
In this decision, the Northern District of Alabama granted the motion for summary judgment brought by the plaintiff National Small Business Association on behalf of its members. An NSBA member who owns two small businesses subject to the CTA is also a plaintiff in this lawsuit. NSBA is a nonprofit corporation that represents and protects the rights of small businesses across the country, including its approximately 65,000 members. The court's ruling bars FinCEN, its employees and other federal agencies from enforcing the CTA against NSBA members. FinCEN confirmed in a March 4 announcement that it will not enforce the CTA against the plaintiffs in this lawsuit (including NSBA members as of March 1) while the court order “remains in effect.”
CTA still in effect for now
Although the court generally found that the CTA exceeds the Constitution's limits on congressional power and is therefore unconstitutional, the court's order does not appear to prohibit FinCEN from enforcing the CTA against entities that are not NSBA members. It is expected that the US Department of Justice will appeal this decision and will seek to stay the effect of this decision pending the outcome of any appeal. Meanwhile, the CTA appears to remain in effect for all non-NSBA reporting companies. Companies subject to the CTA (particularly if they were incorporated in 2024 and have a 90-day post-incorporation period in which to file their initial reports) may be prudent to continue to comply with the CTA's reporting requirements until to have greater clarity regarding the status of the law.