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7 March 20245 minute read

Federal court finds the Corporate Transparency Act unconstitutional: Is compliance still required?

Congress passed the Corporate Transparency Act (CTA) as an anti-money-laundering initiative in 2021. Absent an applicable exemption,[1] the CTA requires all entities formed or registered to do business in the US (reporting companies) to report their beneficial ownership[2] to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

In National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), the National Small Business Association (NSBA) and one of its members brought a suit in the US District Court of the Northern District of Alabama challenging the CTA and FinCEN’s implementing rules. On March 1, 2024, the District Court ruled for the plaintiffs, holding that the CTA is unconstitutional because it “exceeds the Constitution’s limits on the legislative branch.” Slip Op. 3.

The District Court rejected the US government’s arguments that Congress had the power to enact the CTA under its (1) plenary power to conduct foreign affairs, (2) its Commerce Clause authority, and (3) its taxing power, or under its authority to pass laws “necessary and proper” to carrying out those enumerated powers. The District Court identified the “central question” as whether the Commerce Clause authorizes Congress “to regulate non-commercial, intrastate activity when certain entities, which have availed themselves of states’ incorporation laws, use the channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce.” Slip Op. 35 (internal quotation marks omitted). The answer, it found, is “[n]o.” Id.

While the District Court held that the CTA is unconstitutional, its injunction against enforcement applies to only the plaintiffs in this matter, including the NSBA.

What does this mean for CTA compliance?

In response to the ruling, FinCEN published a statement acknowledging that it will comply with the ruling for as long as it remains in effect and, as a result, will not enforce the CTA with respect to the plaintiffs in the action.

FinCEN’s statement explains that the plaintiffs include all entities that were members of the NSBA at the time of the District Court’s March 1, 2024 ruling. Accordingly, so long as the District Court’s injunction remains in effect, any entity that was an NSBA member as of March 1 is shielded from enforcement for non-compliance. For now, all other reporting companies are still bound by the CTA and should continue to comply with the statute’s reporting requirements unless exempt:

  • New entities (ie, entities formed or registered on or after January 1, 2024) that are not exempt should plan to comply with the CTA and its reporting requirements by filing their initial BOI reports within the 90-day[3] timeframe.
  • Existing entities (ie, entities formed or registered prior to January 1, 2024) that are not exempt should continue planning for compliance by the January 1, 2025 deadline while monitoring for legal updates.

What’s next?

The US government is expected to appeal this decision to the US Court of Appeals for the Eleventh Circuit. The government may also seek a stay of the District Court’s ruling pending the appeals process. If a request for a stay is granted, FinCEN would be permitted to continue to enforce the CTA against the plaintiffs, including the NSBA members, during the appeal process.

Similar litigation in other courts is also anticipated; however, it is not clear how other federal district judges will rule on this issue.

This decision comes as many states have started to introduce and implement disclosure laws similar to the CTA, such as the New York LLC Transparency Act. While the District Court’s decision in National Small Business United strikes down the CTA on federal constitutional grounds, it does not affect reporting requirements under state statutes.

If you have any questions about the CTA or the District Court’s decision in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), please contact the authors or your DLA Piper relationship attorney.

For additional information on CTA, please see the related DLA Piper publication, “The Corporate Transparency Act is coming; What you should know.”

[1] The CTA provides 23 exemptions from its reporting requirements for certain entities, primarily those that are already subject to regulation by US governmental authorities. Entities that are not formed or registered to do business in the US fall outside the definition of reporting company and are neither exempt nor are they required to comply with the CTA.
[2] Beneficial ownership means an entity or individual who owns 25 percent or more of the reporting company or where an individual or entity (including persons with zero ownership) exercise “substantial control” over the reporting company such as senior officers and those with discretionary authority to make financial, operational, and/or structural decisions (among others) impacting the reporting company.
[3] This 90-day timeframe will be shortened to 30 days for reporting companies formed on or after January 1, 2025.