UPDATE ON THE CORPORATE TRANSPARENCY ACT
As discussed in our prior blogs, effective as of January 1, 2024, the Corporate Transparency Act (the “CTA”) and rules issued by the Financial Crimes Enforcement Network (“FinCEN”) require most U.S. entities and foreign entities registered to do business in the United States to file reports with FinCEN disclosing information about the entity and its beneficial owners (“BOI Reports”). This blog provides an update on a recent case involving the CTA, a reminder on reporting deadlines, and information regarding the determination of a company’s beneficial owners.
Federal District Court Case in Alabama Rules the CTA Unconstitutional
On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional in response to a lawsuit brought by the National Small Business Association (“NSBA”) and one of its individual members, Isaac Winkles. The lawsuit challenged the constitutionality of the CTA on various grounds, including allegations that the CTA’s reporting requirements exceed Congressional authority under Article I of the U.S. Constitution, and violate the First, Fourth, Fifth, Ninth and Tenth Amendments. The court held that the CTA is unconstitutional because it exceeds Congress’s enumerated powers, rejecting the government’s arguments that the CTA is authorized under the foreign affairs powers, the Commerce Clause, and the taxing powers.
However, Most Companies Still Must Comply
In the ruling, the court remained silent regarding the plaintiffs’ allegations that the CTA violates the specified Amendments. In connection with the ruling, the court also enjoined the federal government from enforcing the CTA as to the plaintiffs in the case. However, this injunction does not extend beyond those plaintiffs.
FinCEN’s Statement
In response to the court’s ruling, FinCEN issued a statement declaring that while the litigation continues, FinCEN will continue to implement the CTA with reporting companies but will comply with the court’s injunction as to the Plaintiffs, Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or company applicant, the National Small Business Association, and members of the National Small Business Association as of March 1, 2024. FinCEN’s statement acknowledges that those individuals are not required to report beneficial ownership information to FinCEN at this time. However, any other reporting companies not covered by the Alabama litigation are still required to comply with the CTA.
Other Litigation Challenging the CTA
In another case filed in Ohio in April of 2024 challenging the constitutionality of the CTA, Robert J. Gargasz Co. v. Yellen, the government defendants moved to hold that case in abeyance pending the outcome of the appeal in NSBA, on the grounds that the underlying issues in both cases are similar, which the court granted.
In May of 2024, the National Federation of Independent Business (“NFIB”) filed a lawsuit against the U.S. Government in the United States District Court for the Eastern District of Texas challenging the CTA and the beneficial ownership reporting requirements.
The lawsuit claims that the CTA exceeds Congress’s authority over the states, it improperly compels speech and burdens associations, it unconstitutionally compels disclosure of private information and the reporting rule is not in accordance with the law. NFIB filed the lawsuit with the Texas Top Cop Shop, Data Comm for Business, Mustardseed Livestock, Russell Straayer, and Libertarian Party of Mississippi.
Additional lawsuits have been filed challenging the constitutionality of the CTA. These cases include many of the same arguments that the court found persuasive in NSBA and piggyback off the plaintiffs’ success.
Conclusion and Recommendations
In the meantime, the CTA filing deadlines remain in effect for most companies, and companies should be prepared to meet these upcoming deadlines. Specifically, for entities formed on or after January 1, 2024, and before January 1, 2025, BOI Reports must be filed with FinCEN within 90 days of formation, unless one of the CTA’s 23 exemptions applies. For entities formed on or after January 1, 2025, unless exempt, BOI Reports must be filed with FinCEN within 30 days of formation. Newly formed entities should consider these short deadlines in connection with entity formation and prepare in advance so they are able to meet the applicable deadlines.
With respect to entities formed before January 1, 2024, if required, BOI Reports must be filed with FinCEN by January 1, 2025. With respect to companies subject to the January 1, 2025 deadline, these companies should prepare in advance to allow sufficient time to analyze beneficial ownership, coordinate with beneficial owners, and prepare the required filings, particularly entities with complex capital structures, multiple entities, and/or large numbers of beneficial owners.