Corporate Transparency Act Held Unconstitutional in Alabama Federal District Court

The Corporate Transparency Act (“CTA”), which came into effect this year, suffered its first blow in the U.S. District Court for the Northern District of Alabama. On March 1, 2024, the court held that the CTA is unconstitutional “because it exceeds the Constitution’s limits on Congress’ power.” The court enjoined the federal government from enforcing the CTA against the plaintiffs, the National Small Business Association (“NSBA”), an Ohio non-profit organization with more than 65,000 members, and Isaac Winkles, a small business owner and member of the NSBA.

The NSBA and Winkles brought suit challenging the constitutionality of the CTA, arguing that it exceeded congressional authority and violated the First, Fourth, Fifth, Ninth, and Tenth Amendments. While not reaching the arguments presented on the First, Fourth, and Fifth Amendment, the court granted plaintiffs’ motion for summary judgment holding 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.” While enjoining the federal government from enforcing the CTA’s requirement against the NSBA and Winkles, it is unknown whether the ruling also extends to all of the members of the NSBA.

In a press release issued on March 4, 2024, the Financial Crimes Enforcement Network (“FinCEN”) acknowledged the ruling and agreed to comply with the ruling vis-à-vis the plaintiffs in the case, stating that FinCEN would not enforce the requirements of the CTA against the plaintiffs and other members of the NSBA at this time. While a substantial win for many business owners who are members of the NSBA, the court’s ruling is limited to the plaintiffs, and the jurisdiction of the court is limited to its Alabama district.

What does this mean for all other businesses subject to CTA? The future implications of the Alabama court ruling may be substantial. FinCEN has previously estimated that the CTA would apply to 32.6 million existing entities and 5 million new entities formed each year from 2025 to 2034. As we’ve previously discussed, the CTA requires that all “reporting companies,” as defined under the CTA, comply with CTA reporting requirements and file beneficial ownership reports (“BOI reports”) with FinCEN. The due date to file BOI reports for entities that existed prior to January 1, 2024, is January 1, 2025, and for entities formed or registered in 2024 is 90 calendar days after receiving an actual or public notice of its formation or registration.

However, since the Alabama court’s ruling is limited to the plaintiffs, all other businesses should continue to comply with CTA reporting requirements unless exempt under the CTA until further notice. There is a strong likelihood that the federal government will appeal this case to the U.S. Court of Appeals for the Eleventh Circuit. Therefore, Dykema anticipates further developments on this case and we will continue to monitor related cases and their implication on the CTA. If you have any questions about the CTA or application of the rules to your business, please reach out to your Dykema relationship attorney.