Federal District Court Rules Corporate Transparency Act Unconstitutional
On Friday, March 1, 2024, the U.S. District Court for the Northern District of Alabama held that the Corporate Transparency Act (“CTA”) is unconstitutional. The CTA, which became effective on January 1, 2024, requires certain “reporting companies” to file information returns about their “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”) (for a brief overview of the CTA, see our client alert here).
In National Small Business v. Yellen, the plaintiffs in the case, the National Small Business Association (“NSBA”) and one of its members based in Alabama (represented by Maynard Nexsen’s John Neiman as well as the Hughes Hubbard and Reed firm), filed suit to enjoin FinCEN from implementing the CTA and its rules and regulations interpreting the CTA. The District Court found that the CTA is unconstitutional because it “exceeds the Constitution’s limits on the legislative branch” for various reasons, including its impingement on areas traditionally reserved for state governments regarding the formation of business entities. The District Court’s injunction prohibits the defendants from enforcing the CTA against the plaintiffs, but does not speak to enforcement of the CTA against other regulated parties. It is highly likely that the government will appeal the District Court’s ruling to the 11th Circuit.
In the meantime, FinCEN announced its intentions with respect to the District Court’s injunction. In a notice released on Monday, March 4, 2024 (the notice can be found here), FinCEN stated that it would comply with the District Court’s order and that “…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 [NSBA], and members of the [NSBA] (as of March 1, 2024).”
Currently, FinCEN is not enforcing compliance with the CTA on members of the NSBA (as of March 1, 2024). However, it appears that FinCEN’s current position is that it will be enforcing the CTA as to all other reporting companies. It remains to be seen whether other similarly situated reporting companies may file challenges seeking the same relief obtained by the NSBA.
In the meantime, if you are not a member of the NSBA it seems clear that FinCEN’s current position is that you will be required to comply with the CTA on the relevant date. For existing reporting companies formed before January 1, 2024, FinCEN is requiring the initial beneficial owner information return on January 1, 2025. For those new reporting companies formed on or after January 1, 2024, the initial beneficial owner information return is due within ninety days of formation.
Should you have any questions regarding the CTA please do not hesitate to reach out to your relationship attorney or the author of this client alert.
About Maynard Nexsen
Maynard Nexsen is a full-service law firm with more than 550 attorneys in 24 offices from coast to coast across the United States. Maynard Nexsen formed in 2023 when two successful, client-centered firms combined to form a powerful national team. Maynard Nexsen’s list of clients spans a wide range of industry sectors and includes both public and private companies.
