On March 1, 2024, the U.S. District Court for the District of Alabama ruled in National Small Business United v. Yellen that the Corporate Transparency Act (CTA) is unconstitutional.  The court found that the CTA goes beyond Congress’s authority provided by the Constitution and lacks a sufficient nexus to an enumerated Congressional power to be a necessary and proper means of achieving the CTA’s anti-money laundering goals.

What is the CTA?

The CTA, which went into effect on January 1, 2024, requires companies to report certain information to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).  It was designed to combat financial crimes like money laundering and tax fraud by requiring companies to provide company information and information about its owners to the federal government.  The CTA applies to “reporting companies,” which is broadly defined under the CTA as all entities that are formed or registered to do business in the United States by filing a document with the secretary of state or a similar office, and foreign entities formed under the laws of a foreign country that filed a document with the United States secretary of state or a similar office.  Failure to report can result in monetary fines, imprisonment, or both.

Summary of Ruling

Plaintiffs Isaac Winkles, the owner of small businesses, and National Small Business United argued that the CTA’s reporting requirements were unconstitutional.  In its decision, the court explained that Congress has a legitimate goal of combatting the illegal activities that the CTA was designed to prevent, but ultimately found that Congress exceeded its scope in enacting the CTA.  The court found that the CTA “transcends the limits imposed by the Constitution on the legislative branch and lacks a strong connection to any enumerated power to serve as a necessary or appropriate means to achieve Congress’ policy objectives.”  It granted summary judgment for the Plaintiffs.

What Does this Mean for Small Businesses?

As a result of the decision, the Plaintiffs in the case are exempted from the CTA.  However, FinCEN and the Department of Justice will be appealing the decision up to the Eleventh Circuit, and FinCEN has made it clear that it will continue to enforce the CTA against other entities that fall under the CTA’s scope.  Accordingly, reporting companies should continue to comply with the CTA.  For entities formed after January 1, 2024, this means reporting ownership to FinCEN within 90 days of formation.  For entities formed prior to January 1, 2024, this means reporting ownership to FinCEN by January 1, 2025.

How Newmeyer Dillion Can Help

Newmeyer Dillion can assist with filings with FinCEN and compliance with the CTA, as well as entity formations and qualifications.