Constitutional Challenge to the CTA

March 7, 2024 Alerts and Newsletters

Recent Development

On March 1, 2024, a federal court in Alabama ruled that the Corporate Transparency Act violates the U.S. Constitution and is unenforceable on its face. The decision (NSBU v. Yellen) is highly technical, but in a nutshell concludes that Congress cannot impose registration and disclosure requirements on millions of entities and their stakeholders merely on the basis of their formation under state law and without regard to their activities. The court rejected claims that sufficient authority could be found within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, or impose taxes. This ruling will no doubt be appealed.

Initial Response from FinCEN

The case was brought by the National Small Business Association and one of its members. In a press release on March 4, FinCEN noted that the court’s injunction against enforcement of the Act extends only to those plaintiffs. FinCEN stated that it will abide by the court’s order “for as long as it remains in effect,” and therefore “is not currently enforcing” the Act against entities that were members of the Association as of March 1, 2024. The clear implication is that FinCEN will enforce the Act as to others.

General Advice

The standard advice at this point is that entities newly formed on or after January 1, 2024 should continue to abide by the 90-day deadline in the Act for filing an initial beneficial ownership report, unless qualifying as an exempt or excluded entity or unless already a member of the National Small Business Association.