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| 1 minute read

Corporate Transparency Act Ruled Unconstitutional

Late on Friday, March 1, 2024, a federal judge in the Northern District of Alabama ruled that the Corporate Transparency Act (“CTA”) is unconstitutional pursuant to a Motion for Summary Judgment. Under the CTA, entities formed by filing a document with the Secretary of State or similar office are required to report certain beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”) as described in a previous client advisory. In total, FinCEN estimated that the CTA would apply to 32.6 million existing entities and the 5 million new entities formed every year going forward. 

This case was brought in 2022 by National Small Business United, d/b/a the National Small Business Association (“NSBA”), and one of its members seeking a permanent injunction against the ultimate implementation of the CTA. The court found in favor of the NSBA on the grounds that the CTA “cannot be justified as an exercise of Congress’ enumerated powers” and is therefore unconstitutional. The court was unpersuaded by the Government’s arguments that the CTA could find a “jurisdictional hook” in Congress’ broad powers to regulate commerce, oversee foreign affairs, and impose taxes. The court did not address the plaintiff's arguments pursuant to the First, Fourth, Fifth, Ninth, and Tenth amendments.

While this is a large initial win for the NSBA, the decision is likely not the end of the CTA and does not suspend the reporting requirements outside of the plaintiffs. The Government will almost certainly appeal the decision to the U.S. Court of Appeals for the Eleventh Circuit in the upcoming months, and there are other similar claims pending in other jurisdictions. Similarly, the court notes that this ruling may have come down differently if the CTA was drafted more carefully, which may result in an amendment to the act itself.  The CTA remains in effect for everyone other than the plaintiffs in this litigation. That said, reporting companies organized prior to January 1, 2024, have until December 31, 2024, to get their filings in place. It might be worth holding off on making these filings for a few months until more definitive information is available. For any reporting companies organized after January 1, 2024, the 90-day requirement for filings is still in place, and those entities should still make timely filings.

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corporate & transactional