Federal Court Declares Corporate Transparency Act Unconstitutional

In November 2022, National Small Business United, doing business as the National Small Business Association (NSBA), sued the Department of Treasury in federal court in Alabama (National Small Business United v. Yellen). NSBA argued that the Corporate Transparency Act (CTA), which was enacted in January 2021 with the purpose of preventing and combating money laundering, terrorist financing, and tax fraud, is unconstitutional on several grounds, including that Congress lacks authority to enact such a law.

See Honigman’s previous coverage, available here, for background on the CTA.

However, on Friday, March 1, 2024, a federal judge agreed, issuing an opinion holding that the CTA is unconstitutional, but the impact of this decision at this point is limited. While the court issued an injunction, this only prohibits the federal government from enforcing the law against those named as plaintiffs in the suit—largely those businesses that are members of NSBA.

In reaching its decision, the court focused its attention on whether Congress had clear authority under the Constitution to legislate this type of mandatory reporting. The Constitution allows Congress rather broad authority to enact laws in key areas, such as the power to levy taxes or regulate interstate commerce. NSBA argued in its complaint that the CTA is not authorized under the relevant parts of the Constitution, including that the law is not a proper exercise of the ability to regulate commerce. The court was persuaded by this and held that there was insufficient jurisdictional justification within the CTA that would allow the law to regulate interstate commerce. Barring such language, the court dismissed other possible avenues for Congressional authority to enact the CTA.

How does this impact your business? In short, not much unless you are a member of the NSBA. The court issued a permanent injunction barring enforcement of the CTA only for the parties named in the lawsuit. The injunction does not prohibit the federal government from enforcing the law against other parties, including the ongoing collection of beneficial ownership information from entities that are subject to reporting requirements under the CTA.

What comes next? The federal government is expected to appeal this ruling, and Honigman anticipates there will be numerous parties that weigh in on any appeal through amicus briefs, both in support of and against the CTA. The Honigman CTA Task Force will closely monitor this litigation, and other potential CTA litigation, for its impact on the firm’s clients. In the meantime, companies and individuals weighing CTA reporting obligations and deadlines in light of this ruling should reach out to Angela Gamalski, Brandy Bruyere or your Honigman Attorney with any questions.