News

Corporate Transparency Act Declared Unconstitutional: Who is Affected?

March 20, 2024

By Rachel E. Covell

The Corporate Transparency Act (“CTA”), 31 U.S.C.S. § 5336, has been found to be unconstitutional by the United States District Court for the Northern District of Alabama. An action brought by the National Small Business Association (“NSBA”) and one of its members challenged the CTA, arguing that the act has overstepped Congressional legislative powers. The Court rejected the government’s argument(s), which attempted to prove that the CTA fell within the powers enumerated to Congress under the Constitution. The Court went as far as to state that the CTA, [*] “lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.”

As of March 1, 2024, litigation is still ongoing, but the Northern District of Alabama’s decision has led to a short-term decrease in CTA compliance requirements for members of the NSBA. Currently under the CTA, companies formed prior to January 1, 2024, have one year (until January 1, 2025) to file an initial report with the Financial Crimes Enforcement Network (FinCEN). FinCEN requires reporting companies to identify (1) beneficial owners of the entity; and (2) the company applicants of the entity.

For businesses that are currently registered under the NSBA, FinCEN has released an update stating that their entity intends to comply with the court’s orders. ** This means, FinCEN is not currently enforcing the CTA against members of the NSBA, pending further litigation. As of March 11, 2024, a notice of appeal was filed relating to the case.

Until litigation has been resolved, it is within the best interest of non-exempt and non-NSBA reporting entities to continue reporting under the CTA. Additionally, businesses not registered under the NSBA but who meet the qualifications for the association should continue to report to FinCEN under the CTA.

* National Small Business Association, et al., v. Janet Yellen, 2024 U.S. Dist. LEXIS 36205

** UPDATED: Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) | FinCEN.gov