The U.S. District Court for the Northern District of Alabama recently ruled that the Corporate Transparency Act (the “CTA”) is unconstitutional. Congress passed the CTA on January 1, 2021 as part of the National Defense Authorization Act of 2020 and directed FinCEN to issue regulations implementing the CTA. The Court reasoned that Congress exceeded the powers granted to it by the Constitution when it enacted the CTA and therefore Congress did not have the authority to enact the CTA and FinCEN lacks the power to enforce it against the plaintiffs in that case.

The plaintiffs in that case are the National Small Business Association, a for profit Arizona association that represents small business members across the United States, and an individual small business owner named Isaac Winkles. The U.S. District Court for the Northern District of Alabama is a federal court in the 11th Circuit. Generally, a court’s ruling has no impact on persons outside the court’s district and not party to a particular case. So Reporting Companies not involved in the lawsuit are still subject to the CTA and its penalty provisions. FinCEN has issued a statement that it will not enforce the CTA against the National Small Business Association, those who are members of that association as of March 1, 2024, and Isaac Winkles.

This news will likely embolden others to file legal challenges to the CTA in other jurisdictions, and FinCEN is expected to appeal that decision to the Eleventh Circuit Court of Appeals. However, those court proceedings will take time and the current ruling only effects the parties named above. All other Reporting Companies remain obligated to comply with the CTA.

Going forward, all Reporting Companies will need to evaluate the cost of compliance with the risk and penalties of noncompliance.

• • Any new Reporting Companies formed or registered to do business in the United States during calendar year 2024 that do not qualify for an exemption have only 90 days to file a BOI report with FinCEN to comply with the CTA. No challenges to the CTA will be resolved in that time so we recommend our clients file BOI reports for newly formed or registered Reporting Companies.
  • Those Reporting Companies in existence or registered to do business in the United States as of January 1, 2024 that do not qualify for an exemption have until the end of calendar year 2024 to file a BOI report. Those Reporting Companies do have time to wait and see how this issue is resolved, although it will not likely be resolved by year end.