By Matthew K. Stevenson – Attorney, Business Law & Taxation Law Practice Group
On March 1, 2024, the United States District Court for the Northern District of Alabama ruled that the Corporate Transparency Act (the “CTA”) is unconstitutional. The court found that the CTA, which requires the federal registration of most corporations, limited liabilities and similar entities operating in the United States, was not sufficiently tied to any of the federal powers granted by the Constitution. How should business owners respond to this ruling?
The CTA is a federal law that came into effect on January 1, 2024, which requires most entities like a corporation, a limited liability company or other entity formed by filing with a secretary of state, to report basic information regarding their ownership to the Financial Crimes Enforcement Network (“FinCEN”). Many exemptions from the CTA reporting requirements exist, including exemptions for tax-exempt 501(c) entities, large operating companies, and entities with no assets or economic activity, but few of them apply to the average business entity. Existing companies that have no exemption must file a report with FinCEN on or before December 31, 2024. New companies that do not have an exemption must file a report with FinCEN immediately following formation. Failure to file a FinCEN report or filing inaccurate or incomplete information may result in large fines and jail time.
In response to the CTA, the National Small Business Association and other plaintiffs brought a claim against the US Department of the Treasury, arguing that the CTA was unconstitutional. The judge in the case examined issues of standing and constitutionality, both being areas the plaintiffs’ and the defendant’s arguments focused on. In particular, the court examined whether the CTA fell under the federal government’s power to tax, regulate interstate commerce, and ensure national security. In each of these areas, the court found that the CTA did not fit within the powers granted to the federal government by the Constitution. As a result, the court found that the CTA was unconstitutional and issued an injunction that exempted the plaintiff from compliance with the CTA.
How does this impact any duty you may have under the CTA to file a report with FinCEN? At least for now, this ruling does not have any impact on your obligations to file.
As of the date of my writing, the US Department of Justice has appealed the Alabama ruling to the 11th Circuit Court of Appeals, and no matter which side the appeals court rules for the loser will likely appeal to the US Supreme Court. During any lengthy appeals process, the courts are likely to allow the CTA to continue to be enforced until there is a final ruling on the matter. Even more critically, the injunction issued by the judge in Alabama only applies to the plaintiffs (the members of the National Small Business Administration business advocacy group).
Businesses and their owners remain obligated to comply with the CTA’s requirements despite the federal district court ruling that the CTA is unconstitutional. This could change in the future if a court issues a broader injunction or if there is a final, unappealed ruling that the CTA is unconstitutional. Until then, pay attention to the CTA filing deadlines and reach out to an attorney if you have any questions about your CTA filing requirements.
Matthew Stevenson is an attorney in the Business Law & Taxation Law practice group. He is also a member of the firm’s Agri-Business industry team.
The information in this article is not intended to provide legal advice. For professional consultation, please contact Matthew Stevenson at Saalfeld Griggs PC. The contents of this publication are current as of March 13, 2024, and should not be construed as legal advice. Information in this publication may only apply in certain states. Readers should not act upon information presented in this publication without individual professional counseling. Receipt of this publication does not constitute or create an attorney-client relationship. The material in this publication may not be reproduced without the written permission of Saalfeld Griggs PC. © 2024 Saalfeld Griggs PC