The Corporate Transparency Act (CTA), enacted by the U.S. Congress on January 1, 2021, introduced significant changes to the corporate governance landscape. The law requires certain business entities—referred to as Reporting Companies—to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury. This transparency requirement aims to combat money laundering, terrorist financing, and other illicit activities. This provides authorities with clearer insights into the ownership structures of businesses operating in the U.S.
However, the CTA has faced several legal challenges since its enactment. Plaintiffs argued that the law infringes upon constitutional rights and exceeds Congress’s powers. As of November 2024, the outcome of these lawsuits is still being determined. However, one thing is clear: businesses should not rely on these ongoing litigations to delay their filing obligations.
What Is the Corporate Transparency Act (CTA)?
The CTA mandates that reporting companies provide beneficial ownership information to FinCEN. A beneficial owner is an individual who, directly or indirectly, owns or controls at least 25% of the company. Also, a beneficial owner has significant control over its operations. The company applicant files the company formation documents.
The law requires this information to be submitted when a business is created and on an ongoing basis if changes to ownership or control occur. By January 1, 2025, all existing Reporting Companies must comply by filing this beneficial ownership information. Failure to comply can result in hefty fines and even criminal penalties.
The goal of the CTA is to provide authorities with a clearer picture of corporate structures, particularly in preventing criminal activities such as money laundering, financing of terrorism, and tax evasion. This law is designed to make it harder for illicit actors to hide behind anonymous corporate entities and will have significant implications for businesses across the U.S.
Why Has the CTA Faced Legal Challenges?
While the CTA is widely seen as a significant step toward enhancing corporate transparency and fighting financial crimes, it has also faced multiple legal challenges. Critics argue that the law infringes upon various constitutional rights, including the right to privacy, the right against self-incrimination, and property rights.
National Small Business Association v. U.S. Department of the Treasury
One of the most notable legal cases challenging the CTA is the National Small Business Association v. U.S. Department of the Treasury. In this case, plaintiffs, including the National Small Business Association (NSBA) and several individual business owners, argue that the CTA is an unconstitutional exercise of congressional power. They contend that it violates the Fourth Amendment (protection against unreasonable searches), the Fifth Amendment (right against self-incrimination), and the Ninth Amendment (right to privacy). Additionally, the plaintiffs assert that the law exceeds Congress’s powers under Article I of the Constitution and infringes upon state sovereignty under the Tenth Amendment.
In March 2024, the U.S. District Court for the Northern District of Alabama ruled in favor of the plaintiffs, finding that the CTA was unconstitutional as an exercise of Congress’s powers under Article I. This decision focused primarily on the federal government’s authority over foreign affairs, interstate commerce, and taxation. However, the court did not address other constitutional claims about privacy, self-incrimination, or compelled speech.
As a result of this ruling, FinCEN announced that it would not enforce the CTA against the plaintiffs or their members but would continue to enforce the law against all other entities.
National Small Business Association is currently under appeal in the Eleventh Circuit Court of Appeals, and a decision is expected in the coming months.
Other Legal Challenges to the CTA
In addition to the National Small Business Association case, several other lawsuits have been filed challenging the CTA’s constitutionality. These challenges generally focus on similar claims regarding violations of the First, Fourth, Fifth, and Tenth Amendments. However, so far, courts have largely sided with the government.
Firestone et al. v. Yellen et al.
In Firestone et al. v. Yellen et al., plaintiffs filed a lawsuit in June 2024 challenging the CTA’s constitutionality. The U.S. District Court for the District of Oregon denied the plaintiffs’ request for a preliminary injunction. The court determined that the plaintiffs lacked standing to challenge the law. The court also found that their claims of harm were insufficient to warrant blocking enforcement of the CTA. This ruling allowed the plaintiffs to continue prosecuting the case, but the CTA remains enforceable against all parties except those involved in the lawsuit.
Community Associations Institute v. Yellen et al.
Similarly, in Community Associations Institute v. Yellen et al., plaintiffs challenged the CTA in October 2024. The plaintiffs argued that the CTA exceeded Congress’s powers under the Commerce Clause and violated the First and Fourth Amendments. The U.S. District Court for the Eastern District of Virginia ruled against the plaintiffs, rejecting their constitutional claims and denying their request for a preliminary injunction. This case is also under appeal.
Will These Legal Challenges Affect Filing Obligations?
Despite the ongoing litigation, businesses should understand that the January 1, 2025 deadline for filing beneficial ownership information with FinCEN is unlikely to be delayed for most entities. While the National Small Business Association case could result in a ruling that affects the CTA’s enforcement for plaintiffs involved in the lawsuit, it is important to remember that the decision would not automatically apply to other reporting companies.
FinCEN has made it clear that it will continue to enforce the CTA against all entities not involved in the ongoing litigation. Therefore, reporting companies should rely on something other than the outcomes of these legal challenges to delay their filing obligations.
Currently, businesses that are required to file under the CTA should begin gathering the necessary information and preparing for the January 2025 deadline. Failure to comply can result in penalties ranging from $500 per day for late filings to criminal penalties, including up to $10,000 in fines and imprisonment for willful noncompliance.
Potential Future Changes to the CTA
While ongoing legal challenges have the potential to delay or alter aspects of the CTA, Congress could also amend the law to address concerns raised in the lawsuits. For instance, H.R. 5119, a bill introduced in December 2023, sought to extend the filing deadline for specific companies, but it has yet to pass in the Senate. Similarly, H.R. 9278, introduced in August 2024, proposes modifications to the CTA, but it remains to be seen whether these bills will pass before the January 2025 deadline.
If Congress amends the CTA, businesses must stay updated on any new developments and adjust their filing plans accordingly.
Conclusion: What Should Reporting Companies Do?
The most important takeaway for businesses subject to the Corporate Transparency Act is that they should not rely on the ongoing litigation to delay their filing obligations. Despite the legal challenges, FinCEN is expected to enforce the CTA against all companies that are not part of the lawsuits, and the January 1, 2025, filing deadline remains intact for the vast majority of reporting companies.
To ensure compliance with the CTA, businesses should begin collecting the necessary beneficial ownership information and prepare to file with FinCEN before the end of 2024. Failure to file can result in significant penalties, including fines and criminal charges, so it is crucial to meet the deadline.
Finally, companies should stay informed about the latest legal developments surrounding the CTA. While changes to the law are possible, the likelihood of significant shifts affecting the filing deadline or requirements seems low. Businesses should work with legal professionals to navigate these complex requirements and ensure compliance with federal regulations.
References
- U.S. Department of the Treasury, Financial Crimes Enforcement Network (FinCEN). (2024). Corporate Transparency Act: Reporting Requirements for Beneficial Owners. Retrieved from https://www.fincen.gov
- National Small Business Association v. U.S. Department of the Treasury, U.S. District Court for the Northern District of Alabama. (2024). Case Summary. Retrieved from https://www.jdsupra.com
- Firestone et al. v. Yellen et al., U.S. District Court for the District of Oregon. (2024). Case Analysis. Retrieved from https://www.law360.com
- Community Associations Institute v. Yellen et al., U.S. District Court for the Eastern District of Virginia. (2024). Ruling Summary. Retrieved from https://www.lexology.com
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