Executive Summary:

• The Corporate Transparency Act, a new federal law that requires millions of U.S.-based closely held businesses to file ownership information with the Financial Crimes Enforcement Network (FinCEN), has been declared unconstitutional by a lower court.
• The U.S. Federal District Court for the Northern District of Alabama declares the Corporate Transparency Act unconstitutional.
• The relief granted by this ruling is limited to the plaintiffs in the case. Reporting companies not involved in the case must still comply with all filing deadlines.

By Kyle Baird

On Friday, March 1, 2024, in the case National Small Business United, d/b/a the National Small Business Association vs. Janet Yellen. U.S. District Court, N.D. of Alabama, the court found that the CTA exceeded the power granted to Congress under the Constitution. The Court concluded: “The Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’s enumerated powers.”

The law sought to broadly collect private information on company ownership and control, enforced by substantial penalties. The court ruled that Congress overstepped its authority.

For now, this ruling pauses CTA enforcement only for the plaintiffs in the case – the association National Small Business United and its members. However, the government may appeal or revise the law to address the court’s concerns. We do not yet know the ultimate fate of the CTA’s reporting requirements, but we will keep you informed.

Here is the statement from FinCEN following the ruling:

Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) Immediate Release March 04, 2024

On March 1, 2024, in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), a federal district court in the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment, concluding that the Corporate Transparency Act exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the Corporate Transparency Act against the plaintiffs. FinCEN will comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.

Note that a similar lawsuit is currently pending here in Ohio, in the U.S. District Court for the Northern District of Ohio: Robert J. Gargasz Co. v. Yellen. We will keep you informed on the impact that ruling has, if any, on CTA filing requirements.

Even with this uncertainty, we recommend proactive steps to ensure your business minimizes the risk of penalties:

• With the exception of those who participated in this case and were granted relief based on this ruling, reporting companies must comply with all applicable filing deadlines for now.
• Review and update your company’s governing documents, including LLC agreements and shareholder agreements. Be sure corporate records like meeting minutes are organized and current.
• Examine any trusts that own part of your business. Evaluate whether changes may be beneficial.
• Focus on proper structuring and governance of your business, regardless of the CTA regulations and outcome. Get in touch to discuss your unique situation.
• Watch our recent webinar on the topic to learn more.

Follow us at Wegman Hessler Valore to stay informed on any new requirements and timelines that may impact your company. We are here to answer any questions and provide guidance during this fluid situation. If your business is located in the State of Ohio, we invite you to contact our offices.

Wegman Hessler Valore specializes in business law for business leaders, applying legal discipline to solve business problems to help leaders run smarter. For over 50 years, this Cleveland law firm has provided full-service strategic legal counsel for closely held businesses, corporations, and individuals. Practice areas include: business law; litigation; corporate governance; estate planning and wealth protection; intellectual property; family law for business owners; HR and employee matters; commercial real estate; business acquisition, and more. Get in touch to learn more.

Visit wegmanlaw.com or call us at (216) 642-3342.

Copyright © Wegman Hessler Valore. This information is for educational purposes. It does not reflect an attorney-client relationship with the author(s) or the firm. This information should not be used as a substitute for professional legal advice in specific situations.