Challenging the Corporate Transparency Act: National Small Business United v. Yellen

In 2021, Congress enacted the Corporate Transparency Act (CTA) with the aim of combating money laundering. Under this legislation, all entities operating in the United States, unless exempted, are obligated to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) within the Department of Treasury.

National Small Business United v. Yellen, a case filed in the U.S. District Court for the Northern District of Alabama, challenged the constitutionality of the CTA and FinCEN's regulations. On March 1, 2024, the District Court sided with the plaintiffs, ruling that the CTA exceeds the constitutional limits on legislative authority.

The court dismissed the government's arguments, including arguments involving Congress's authority to regulate foreign affairs, the Commerce Clause, and its taxing power. It concluded that the central question revolved around whether Congress could regulate non-commercial, intrastate activity when certain entities, incorporated under state laws, impact interstate and foreign commerce. The court decided that Congress cannot.

While the District Court's decision invalidates the CTA, its injunction only applies to the plaintiffs, which include the National Small Business Association (NSBA).

In response to the ruling, FinCEN announced that it would comply with the injunction and refrain from enforcing the CTA against the plaintiffs. The injunction protects all entities that were NSBA members as of March 1, 2024, from facing enforcement actions for non-compliance.

For other reporting companies not covered by the injunction, compliance with the CTA remains mandatory. New entities formed or registered after January 1, 2024, should adhere to reporting requirements within the designated timeframe. Existing entities, formed or registered before January 1, 2024, should continue preparing for compliance by the January 1, 2025 deadline.

The U.S. government is expected to appeal the District Court's decision to the U.S. Court of Appeals for the Eleventh Circuit and may seek a stay of the ruling during the appeals process. Other similar litigation in different jurisdictions is anticipated, but its outcome remains uncertain.

Despite the District Court's ruling on federal constitutional grounds, it's important to note that state-level disclosure laws, such as the New York LLC Transparency Act, remain unaffected.

Since the CTA continues to be enforceable law, Lodmell & Lodmell strongly encourages you to report your companies that are required to do so. For a step-by-step guide on how to report your entities, click here.

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