On March 1, a federal judge in the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional. The Act, passed in 2021, would require nearly all small business owners to file a Beneficial Ownership Information Report with the Financial Crimes Enforcement Network.
But with the ruling, this controversial requirement is on hold. Over 32 million small business owners can breathe a sigh of relief, for now.
What is the Corporate Transparency Act?
The purpose of the Corporate Transparency Act is reportedly to help the federal government fight financial crimes and promote national security. The idea is that by knowing who has created small businesses like LLCs and S-Corporations, it can help law enforcement stop activities like money laundering and financing of terrorism.
The Act began to take effect on January 1, 2024. Most small businesses are required to file a Beneficial Owner Information Report with the FinCEN. The report asks for information such as who the members of an LLC are, who managing or controlling corporate officers are, etc.
Businesses formed prior to January 1, 2024 have until January 1. 2025 to file their reports. Business formed in 2024 have 90 days from the date of formation to do so. After January 1, 2025, businesses will have just 30 days to file.
Failure to can subject business owners to hefty civil and criminal penalties.
Why Was the Act Ruled Unconstitutional?
An association of small business owners filed a lawsuit against the Secretary of the Treasury. The case is titled National Small Business United v. Yellen, Case No. 5:22-cv-1448-LCB.
In the lawsuit, the plaintiffs filed a motion for summary judgment, asking the court to make a ruling without needing a jury. This type of motion is common when there are only legal issues the court needs to address.
In its ruling on the motion for summary judgment, the court found that the Act does not have an enumerated power in the Constitution that authorizes it. Though the court was sympathetic to the idea, it rejected the notion that laws are constitutional just because they have good intentions or are allegedly for a particular purpose.
Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.
What’s Next for the Corporate Transparency Act?
For the time being, the Act is not enforceable as the court has issued an injunction. The exact scope of the injunction is not immediately clear, though (whether it applies to everyone immediately, or just the named parties). The federal government will undoubtedly appeal this decision. The appeal would go to the United States Court of Appeals for the 11th Circuit.
If the feds do appeal, there will be briefing, oral argument, and likely months before the court issues a ruling on whether to affirm or reverse. The Act may still be on hold going into 2025.
Connell Law, PLLC is watching this matter closely and will inform our clients about this decision. Please reach out to us if you have further questions about the Corporate Transparency Act or other small business legal matters.