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On March 1, 2024, a federal judge ruled that the Corporate Transparency Act is unconstitutional, marking a milestone in the 16-month ongoing legal battle led by the National Small Business Association and supported by the S-Corporation Associates of America and the members of the Main Street Employers Coalition, including ABC.

Importantly, according to a statement from FinCEN, the decision is limited at the moment to the plaintiffs—members of the National Small Business Association, a national association with 65,000 members. Given the narrow exemptions for NSBA members, unless the Treasury Department suspends enforcement of CTA for all businesses that are obligated to file, CTA beneficial ownership reports will still need to be filed.

However, the ruling is sure to set the stage for an elevated judicial battle over the CTA. Already, on March 11, the Department of Justice filed a notice of appeal on behalf of Treasury. Given the high level of uncertainty following the ruling, there is a chance for a stay in the law’s implementation until the 11th Circuit has a chance to rule or a stay pending appeal of the ruling.

For now, ABC urges members and small business owners to continue to review the ruling with counsel to assess its implications. In the meantime, ABC will seek delay and repeal of the law and provide updates to ABC members on the legal challenges.

Background on the Corporate Transparency Act

On Jan. 1, 2021, Congress enacted into law the Corporate Transparency Act, which establishes a new framework for the reporting, maintenance and disclosure of beneficial ownership information in order to better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity, among other items.

ABC, along with a coalition of small business organizations, submitted a letter to congressional leadership expressing concerns on the amendments incorporating the CTA into the 2021 National Defense Authorization Act, stating the enactment of the CTA would decrease privacy protections and slow the economic recovery of Main Street.

ABC responded to the U.S. Department of Treasury’s Financial Crimes Enforcement Network notice of proposed rulemaking seeking public input on how best to implement the reporting requirements of the CTA, as well as the CTA’s provisions regarding FinCEN's maintenance and disclosure of reported information in comments. In summary, ABC’s comments noted that the framework prescribed by the CTA will require millions of small businesses, including nearly every employer with 20 or fewer employees, to report to FinCEN certain personal information of their beneficial owners and update that information periodically throughout the life of the business.

ABC also argued that America’s small businesses—which include most of ABC’s members—are typically not staffed or well-equipped to understand and comply with reporting obligations similar to those under the CTA. However, per the CTA, failure to comply can result in significant fines and imprisonment for these small business owners.

ABC, S-Corp and Main Street Employers supported a legal challenge filed by the National Small Business Association, alleging that the CTA violates a laundry list of constitutional protections. In the decision issued on March 1, Judge Liles C. Burke for the Northern District of Alabama Northeastern Division outlined many of the same arguments, saying:

“This case presents a deceptively simple question: Does the Constitution give Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a State? The Government thinks so. While it acknowledges that Congress “can exercise only the powers granted to it,” the Government says that the CTA is within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations. The Government’s arguments are not supported by precedent. Because the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals, the Plaintiffs are entitled to judgment as a matter of law. As a result, the Court grants the Plaintiffs’ motion for summary judgment and denies the Government’s motion to dismiss and alternative cross-motion for summary judgment.”

ABC will continue to track this ongoing issue in the Beltway Blueprint and Newsline.