What this is: A Federal District Judge issued a judgment in a lawsuit challenging the constitutionality of the Corporate Transparency Act (“CTA”), declaring it unconstitutional, and the government has appealed the judgment.
What this means: At present, the government is enjoined from enforcing the CTA’s beneficial ownership reporting requirements against the specific plaintiffs in the case. FinCEN has announced that the CTA is currently enforceable against those that are not a party to the lawsuit. There have been additional challenges from plaintiffs in Maine and Michigan, detailed at the end of this article.
On March 1, 2024, the United States District Court for the Northern District of Alabama issued a final judgment in the case National Small Business United v. Yellen, No. 5:22cv01448 (N.D. Ala.), declaring the federal Corporate Transparency Act “unconstitutional because it exceeds the Constitution’s limits on Congress’ power.” On March 11, 2024, the government appealed the final judgment. Below we discuss key aspects of this case, its scope and its implications for the over 32 million companies that the federal government estimates are subject to the CTA’s beneficial ownership reporting requirements.
Procedural Background
In November 2022, the plaintiffs in this case, the National Small Business Association (NSBA) and one of its members, Isaac Winkles, sued US Department of the Treasury Secretary Yellen and others challenging the constitutionality of the CTA, alleging that its beneficial ownership disclosure requirements “exceed Congress’ authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth and Tenth Amendments.” Both sides filed motions for summary judgment and the government filed a motion to dismiss. The Court heard oral arguments on these motions last November and issued its final judgment on March 1, 2024, deciding the case in favor of the NSBA through summary judgment. On March 11, 2024, the government appealed the final judgment to the Eleventh Circuit Court of Appeals. The outcome of the government’s appeal is currently pending.
The CTA
Congress enacted the CTA in January 2021 and it took effect on January 1, 2024. Its stated purpose is to make it more difficult for criminals to hide their identities through the use of “shell companies” to fund terrorism, drug trafficking and other illicit activities. The CTA requires all “reporting companies,” that is, non-exempt domestic corporations, LLCs and other similar entities created by the filing of a document with a Secretary of State or other similar office (and all non-US entities registered to do business in the US by the filing of a document with a Secretary of State or other similar office) to, among other things, disclose personal identifying information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of Treasury. Congress requires FinCEN to house this information in a private, secure database available only to law enforcement and certain others upon a proper showing of the need for the information, such as for a criminal investigation or to financial institutions with the customer’s permission. If a reporting company falls within any of the 23 exemptions to the CTA, it is not required to file a BOI Report with FinCEN. Most of the 23 exemptions relate to industries which are already heavily regulated, which the NSBA asserts leaves millions of small, legitimate businesses subject to the CTA’s beneficial ownership information disclosure requirements. The CTA imposes significant civil and criminal penalties for non-compliance.
Who is the NSBA and Why Did it File This Lawsuit?
The NSBA is an Ohio-based nonprofit organization who, according to its website, is “America’s Small Business Advocate” and has 65,000 members. The NSBA alleged in this lawsuit that the CTA unfairly targets “law-abiding small-business owners” forcing them to “disclose their sensitive personal information to a government database,” in violation of the Constitution.
What Was the Issue in the Case?
The Court stated that the issue in this case was whether Congress has the power under the Constitution to regulate “millions of entities and their stakeholders the moment they obtain a formal corporate status from a State.”
Stop by our Corporate Transparency Act resource center and have a look around for informative articles, webinars and even a CTA Exemption wizard.
What Was the Government’s Response?
The government argued that Congress does indeed have the authority to require reporting companies to disclose beneficial ownership information because “the CTA is within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations” and expanded on these arguments in its court papers.
The Court’s Final Judgment
The Court found “the government’s arguments are not supported by precedent” and ruled that “the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals…” The Court states in its memorandum opinion that “Congress is bound by the Constitution’s enumerated powers limitation here, because incorporation is an internal affair” and that corporations “are creatures of state law.” The final judgment states in part: “The Defendants, along with any other agency or employee acting on behalf of the United States are PERMANENTLY ENJOINED from enforcing the Corporate Transparency Act against the Plaintiffs.”
FinCEN’s Statement in Response to the Final Judgment
FinCEN released the following statement on its website regarding the Court’s final judgment:
“On March 1, 2024, in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), a federal district court in the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment, concluding that the Corporate Transparency Act exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the Corporate Transparency Act against the plaintiffs. The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal on March 11, 2024. While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction, as specified below, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.
FinCEN is complying with the court’s order and will continue to comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.”
What is the Scope of the Final Judgment, and is the CTA Still in Effect After the Final Judgment?
The Court’s final judgment states that the government is enjoined from enforcing the CTA against the specific plaintiffs in the case, rather than that the government is enjoined from enforcing the CTA altogether. FinCEN has clarified that, at this time, any non-exempt “reporting company” that is not a plaintiff in the case is still subject to the CTA’s reporting requirements.
What’s Next
As anticipated, the US Department of Treasury filed an appeal to the US Court of Appeals for the 11th Circuit, challenging the USDC’s final judgment. We are monitoring this closely as it is developing.
Additionally, new plaintiffs in Maine and Michigan have brought lawsuits claiming the CTA is unconstitutional. First, on March 15, 2024, plaintiff William Boyle initiated Boyle v. Yellen, No. 2:24-cv-00081-LEW (ME) in the US District Court for the District of Maine. Then, on March 27, 2024, the Small Business Association of Michigan (SBAM), which reportedly represents more than 32,000 Michigan small business owners, initiated Small Business Association of Michigan, et al v. Yellen, No. 1:24-cv-314 (MI) in the US District Court for the Western District of Michigan, Southern Division. We expect to see more lawsuits challenging the CTA’s constitutionality in the coming months.
FAQs
What are the CTA’s beneficial ownership reporting requirements?
Among other things, the CTA requires all non-exempt “reporting companies” to disclose to FinCEN the full legal name, date of birth, residential address, and unique identifying number (e.g., unexpired state identification card number, unexpired driver’s license number or an unexpired US passport number) of each of its “beneficial owners” and to include a scanned copy of the identifying document. For more information, read our article, FinCEN Issues Final Rules on the Corporate Transparency Act’s Beneficial Ownership Reporting Requirements.
How far up must you report if companies are owned by other companies?
“Beneficial owners” are individuals and not entities under the CTA. Therefore, unless exemptions apply, “reporting companies” owned by other “reporting companies” must provide information on each individual “beneficial owner." To read more, visit our article, Asked and Answered: More Questions About the Corporate Transparency Act.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
