Passed in 2021, the Corporate Transparency Act (CTA) is a law aimed to combat financial crimes by increasing transparency around business ownership. The goal was to make it harder for criminals to hide their activities by establishing a database of beneficial owners for certain businesses. It’s a law that applies to many companies operating in the United States, notably corporations and LLCs, but with some exceptions.
Businesses meeting the criteria need to submit a Beneficial Ownership Information (BOI) Report to the Financial Crimes Enforcement Network (FinCEN). The report includes details about the beneficial owners, including name, date of birth, address, and Social Security number, and information about the business itself. The CTA stated that for new companies formed after January 1, 2024, information about the individuals who formed the company should be filed within 90 days after receiving state approval. One of the major penalties for failing to comply with the new rule was a $500 daily fine until the BOI was filed to FinCEN.
The CTA has, however, been ruled unconstitutional. In a lawsuit filed by the National Small Business United (NSBU) against Secretary Janet Yellen and the Department of Treasury, the judge’s decision in Alabama focused on the idea that the CTA exceeded Congress’s power. U.S. District Court Judge Liles C. Burke wrote a 53-page legal opinion and sided with the NSBU. The ruling permanently prevents FinCEN from enforcing the CTA against plaintiffs.
The government argued that Congress has the power to enact the CTA under its plenary power to conduct foreign affairs; via its Commerce Clause authority; and as a necessary and proper exercise of its taxing power.
The judge argued that the CTA wasn't authorized by the powers granted to Congress in the Constitution. The Constitution outlines specific things Congress can do, and the judge believed the CTA wasn't justified under any of those powers.
The judge also rejected the government's argument that the CTA fell under the "Necessary and Proper Clause" of the Constitution. This clause allows Congress to pass laws that are essential to carrying out its enumerated powers. The judge ruled that the CTA wasn't necessary to achieve any of Congress's existing powers. The Act “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any numerated power to be a necessary or proper means of achieving Congress’ policy goals,” the opinion said.
While the legislation may have “sensible and praiseworthy ends,” the court stated in its opinion, the government’s arguments that Congress has “the power to regulate millions of entities and their stakeholders the moment they obtain a formal corporate status” from a state “are not supported by precedent.” The Act clearly exceed
Essentially, the court concluded that the CTA wasn't a legitimate exercise of Congress's authority because it didn't regulate interstate commerce or function as a tax measure, and it wasn't demonstrably necessary to achieve any existing power.
If the CTA was ruled as unconstitutional, does it means that business owners across the country will no longer have to file their BOI? The ruling only involves the plaintiff, which is the National Small Business Association, which was part of the National Small Business United. The NSBA has more than 65,000 members nationwide. This means that the CTA is still effective for any business that isn’t part of the NSBA. The decision will certainly be appealed to the 11th Circuit Court of Appeals in Atlanta. Based on the what the appellate court will decide, the case may go all the way to the U.S. Supreme Court. In the meantime, businesses that aren’t members of the NSBA will certainly have to continue filing their BOI.