The Corporate Transparency Act (CTA), which took effect on January 1, 2024, represents a significant shift in the regulatory landscape of U.S. businesses. This legislation, aimed at thwarting financial crimes such as money laundering and tax evasion, mandates that companies operating within the U.S. disclose their beneficial owners. While the intent of the CTA is to enhance transparency and combat illicit financial activities, its implementation has sparked significant legal controversies, culminating in the landmark case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. Mar. 1, 2024.). On behalf of the Department of the Treasury, the Justice Department filed a Notice of Appeal, on March 11, 2024, to the United States Court of Appeals for the Eleventh Circuit.
The Core of the Corporate Transparency Act Controversy
In the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. Mar. 1, 2024.), the court ruled that the Corporate Transparency Act exceeded Congress’ authority under Article I of the Constitution and violated the First, Fourth, Fifth, Ninth, and Tenth Amendments. The CTA, which was aimed at preventing financial crimes by requiring most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department, was challenged on the grounds that it intruded on areas traditionally left to the states, such as corporate formation.The court drew parallels with the Supreme Court’s decision in Bond v. United States, 564 U.S. 211 (2011), which held that federal law should not intrude on local criminal activity unless Congress has clearly indicated that the law should have such reach. The court found that the CTA converted a significant amount of traditionally local conduct into a matter for federal enforcement and involved a substantial extension of federal police resources. On appeal, the government is likely to re-assert that the CTA falls within Congress’ power to regulate national security and foreign affairs, as well as interstate commerce. The Treasury had previously argued that Congress rationally concluded that the ability of certain legal entities to withhold beneficial ownership and applicant information, taken together, substantially affects interstate commerce. However, the court disagreed with this argument, stating that the act of forming a corporation is not an economic activity that might, through repetition elsewhere, substantially affect any sort of interstate commerce. The court also disagreed with the Treasury’s argument that the CTA was necessary and proper to carry out Congress’ foreign affairs powers.
Immediate Implication for Businesses
Though the regulation was deemed unconstitutional, FinCEN, the federal agency responsible for collecting ownership and management data through Beneficial Owner Information (BOI) reports, has clarified that the court’s decision is limited to the plaintiffs involved in the lawsuit. Consequently, the requirement to submit the BOI report remains in effect, outlined in 31 C.F.R. § 1010.380. New businesses formed in 2024 are required to submit their BOI report to FinCEN within 90 days of their establishment. Thus, these new entities cannot delay their compliance in anticipation of the appeals process, which is not expected to conclude until at least the fall. For businesses established before 2024, the deadline to file is extended until January 1, 2025. Non-compliance with these requirements could lead to severe penalties, including substantial fines and potential imprisonment. The current fines are $500 per day up to $10,000 and 2 years in prison. It is conceivable that plaintiffs from various states might initiate further lawsuits challenging the CTA. For example, on March 26, 2024, the Small Business Association of Michigan and other plaintiffs filed a complaint in the United Sattes District Court for the Western District of Michigan challenging the CTA on a variety of constitutional grounds. Consequently, the definitive ruling on the CTA’s constitutionality will probably be issued by the U.S. Supreme Court, particularly if Congress fails to amend the act’s provisions to address constitutional concerns.
Conclusion
The case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. Mar. 1, 2024.) provides a legal reference point for the implementation of the Corporate Transparency Act. With the appeal pending, businesses should remain vigilant and prepared to adjust their compliance strategies based on the final outcomes. As the legal battles continue, staying informed is crucial. We recommend consulting with legal experts and following updates on this case as they develop. The simplest and safest solution is to go online and provide the basic information. The link to fill out the form is https://boiefiling.fincen.gov/boir/html. There is also a FAQ on the FinCEN website https://www.fincen.gov/boi.
The Corporate Transparency Act and Your Business
Do you need help navigating the implications of the Corporate Transparency Act for your business? Co-founder of Gatlin Voelker, Jack Gatlin, has years of experience providing counsel to business owners. If you are interested in discussing your matter with Jack, call (859) 781-9100.
