Days after an Alabama U.S. District Court judge ruled the Corporate Transparency Act—sometimes called the CTA—unconstitutional, businesses and their advisors are scrambling to figure out what it means and which businesses might be protected by the ruling.
The decision resulted from a lawsuit filed by the National Small Business United (also known as the National Small Business Association, or NSBA) and Isaac Winkles, an Alabama business owner and NSBA member. On March 1, 2024, U.S. District Judge Liles C. Burke of the Northern District of Alabama, Northeastern Division, found the CTA unconstitutional “because it exceeds the Constitution’s limits on Congress’ power.”
The ruling, on its face, bars the U.S. Treasury from enforcing the CTA against the named plaintiffs—including the 65,000-member NSBA— but does not enjoin enforcement against others.
The CTA requires certain companies—generally, those formed by filing with the secretary of state or similar office under the law of an individual state—to file reports with the federal government identifying the company’s beneficial owners. That, the plaintiffs argued, is an overreach of power by the federal government.
Legal Issues
The NSBA and Winkles were represented by special counsel Thomas Lee and partner Terence Healy of Hughes Hubbard & Reed, an international law firm with headquarters in New York, along with co-counsel John Neiman of Maynard Nexsen.
Lee confirmed in an email to Forbes that the ruling was against the government enforcing the CTA reporting requirements, which “applies immediately to all NSBA members across the country, unless and until the Government obtains a stay pending appeal, which we would challenge.”
“Our understanding is that the order enjoining the CTA reporting requirements applies to all current NSBA members,’’ echoed an NSBA spokesperson.
One issue that’s unclear, however, is whether the ruling would also apply to small businesses that join the NSBA after the date of the March 1 opinion. However, in a previous case, SAF, et.al. v. ATF, et. al, the plaintiffs, the Second Amendment Foundation, have taken the position that the ruling applies to all members, regardless of when they join. In that case, the SAF noted that interest in membership was so heavy during the first 24 hours after the ruling that its website crashed.
There hasn’t been any pushback on that take, says Adam Kraut, SAF’s executive director. That makes sense, he explains, based on the plain language of the order which extends to the organization’s members. There is, he said, no limiting language that would suggest a restriction. “Our reading is that it applies to all members,” he says, “regardless of when they joined.”
There is similarly no limiting language in the NSBA order.
For businesses that aren’t in—or don’t rush to join—the NSBA, the impact of the ruling is even less clear. Lee acknowledges that the ruling was narrow, noting the injunction only applies to Isaac Winkles and NSBA and its members. “It would be up to the Government,” he notes, “whether they will seek to enforce the reporting requirement on other similarly situated businesses who are not NSBA members.”
Lee noted that he expected an appeal from the government, adding, “we also expect to win the appeals.”
The U.S. Treasury has so far not responded to a request for comment.
Background
In 2021, Congress passed the Corporate Transparency Act—or CTA—as part of the National Defense Authorization Act for Fiscal Year 2021. The law requires certain companies to file reports that identify a company’s beneficial owners with the Financial Crimes Enforcement Network—called FinCEN.
For purposes of the CTA, reporting companies can be domestic companies created under the laws of a state or Indian tribe or entities formed under the law of a foreign country registered to do business in any state or tribal jurisdiction. This can include limited partnerships, limited liability partnerships (LLPs), business trusts, LLCs (including SMLLCs), and corporations—typically, any entity you would register with the state.
On January 1, 2024, the Department of the Treasury officially began accepting beneficial ownership information reports. A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial report, while a reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial report. Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial reports with FinCEN.
According to the complaint, the CTA’s reporting requirements will apply to approximately 32.6 million “reporting companies” in 2024 and an estimated 5 million additional companies annually. The complaint noted that the law’s purpose “is to enhance measures to combat financial crimes, such as money laundering and terrorism financing,” which it agreed are “admirable and important aims.” However, the NSBA charged that “while attempting to fight crime, the CTA imposes its heaviest burdens on law-abiding U.S. citizens and permanent residents.”
Reactions
Obviously, the National Small Business Association was pleased with the outcome. The organization describes itself as “staunchly nonpartisan” advocate for America’s entrepreneurs and currently boasts 65,000 members nationwide.
“The CTA has from the very beginning been poor policy that unfairly targets America’s small businesses,” said Todd McCraken, President and CEO of NSBA.
“This ruling justifies the concerns of millions of American businesses about how the CTA is not only a bureaucratic overreach, but a Constitutional infringement. The judge’s decision is an opportunity for Congress to go back to the drawing board and find a solution that not only protects Americans from bad actors here but overseas. The CTA simply will not accomplish the goal of stemming money-laundering – what it does is overstep the bounds of privacy, the law, and common sense at the expense of America’s small businesses.”
“As the court noted, the ultimate goals of the CTA, countering money laundering and terrorism financing are laudable,” said John Neiman, counsel for the NSBA and Winkles. “But as the court also noted, the Constitution sets limits on what Congress can do to achieve even the most laudable of goals, and Congress violated those limits here. Congress can find a way to achieve these goals without exceeding the limits on its powers under the Constitution.”
“The judge’s decision is an opportunity for Congress to go back to the drawing board and find a solution that will truly protect Americans from bad actors,” said McCraken. “The CTA simply will not accomplish the goal of stemming money-laundering – what it does is overstep the bounds of privacy, the law, and common sense at the expense of America’s small businesses.”
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