Update on the Corporate Transparency Act

By Natasha Bhushan – August 2024

The Corporate Transparency Act (the “CTA”),[i] effective January 1, 2024, is arguably the most far-reaching federal legislation in twenty years. It requires an estimated 32.6 million existing business entities, plus an estimated 5 million new business entities per year,[ii] to report personal information about the entity’s owners and control persons (termed “beneficial owners”) to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Treasury Department. This personal information includes full legal name, date of birth, residential address, and a copy of government-issued identification, such as a driver’s license or passport. All reported information must be kept current.

Congress enacted the CTA in 2021, as part of the of National Defense Authorization Act. Congress’s rationale for the CTA is that criminals exploit state formation laws to conceal their identities when forming corporations or LLCs, and then use those businesses to facilitate crimes, notably terrorism, money laundering, tax evasion, and foreign corruption.[iii] The law is purportedly designed to prevent criminals from hiding behind business entities and to provide law enforcement with information helpful to criminal investigations.

The CTA targets small, privately-held entities. Most small or family-run corporations and LLCs, which make up most American businesses, are subject to the law’s reporting obligations. Large operating companies, publicly-traded companies, and tax-exempt entities are among the entities exempt from the reporting requirements. Any doubt about whether a particular entity is required to file should be resolved in favor of filing, given the steep penalties for non-compliance. These include civil fines of $500 per day up to $10,000 per violation (the fines can add up quickly, especially for failing to keep information up-to-date) and criminal charges that could result in up to two years in prison.

Perhaps unsurprisingly, the unprecedented scope of the CTA and the burdens it imposes on small businesses have already made it the target of several court challenges and congressional bills.

The first U.S. District Court to rule on the CTA found it unconstitutional. On March 1, 2024, in National Small Business United v. Yellen, No. 5:22-cv-1448, the U.S. District Court of Alabama ruled, on cross-motions for summary judgment, that the CTA exceeds Congress’s enumerated powers. The court issued a permanent injunction halting enforcement against the plaintiffs, including the National Small Business Association (“NSBA”). The court explicitly rejected the federal government’s arguments that the CTA is a valid exercise of Congress’s power over foreign affairs, commerce, or taxation, or is justified by the necessary and proper powers. The court’s decision paid special attention to the commerce clause, noting: (1) the CTA regulates entity formation rather than the use of channels or instrumentalities of commerce; (2) the connection between entity formation and criminal activity is too attenuated to justify regulating formation under the commerce power; and (3) Congress failed to include a jurisdictional hook (e.g., “affecting commerce,” “in commerce”) in the language of the CTA that would indicate an intent to regulate under the commerce power.

The case has been appealed to the U.S. Court of Appeals for the Eleventh Circuit, with oral argument currently scheduled for the week of September 23, 2024.[iv] A decision is expected early next year,[v] with potential Supreme Court review later in 2025. FinCEN has stated that while review is pending, the CTA remains in effect for all entities, except the plaintiff-appellees.[vi]

Similar cases challenging the constitutionality of the CTA have been filed in the U.S. District Courts for the Northern District of Ohio, Western District of Michigan, District of Maine, and Eastern District of Texas. It remains to be seen whether the decisions there will have anything to say on constitutional issues not addressed by the Alabama district court, including whether the CTA invades the rights to privacy and freedom of association, whether reporting requirements constitute an illegal search without a warrant, and whether certain language, including a test to determine “beneficial owners,” is unconstitutionally vague.

If any of these challenges are ultimately successful, it seems likely that Congress will amend the CTA to address the constitutional problems identified by the courts. These fixes may include narrowing the types of entities that must file BOI Reports. For example, the U.S. District Court for the Northern District of Alabama’s decision mentioned that if the CTA only regulated entities engaged in “commerce,” that may be an acceptable exercise of Congress’s Article I powers under the Supreme Court’s Commerce Clause. If another court determines that the CTA violates a constitutional right to privacy, Congress may be forced to change the personal information beneficial owners are required to report.

Meanwhile, bills to repeal the CTA have been introduced in both the House and Senate. Following the Yellen decision, on April 30, Representative Warren Davidson (R-OH), along with eleven other House Republicans, introduced the Repealing Big Brother Overreach Act in the House. Senator Tommy Tuberville (R-AL) subsequently introduced the bill in the Senate. More than 100 trade organizations across every major American industry sent a joint letter to Representative Davidson expressing support.[vii]

A less ambitious bi-partisan bill, The Small Business Red Tape Relief Act, introduced in the House by Representative Zach Nunn (R-IA) on April 11, and co-led by Representative Henry Cueller (D-TX), does not go so far as repealing the CTA, but would purportedly alleviate some of the burden on small businesses. Nunn’s office claims the legislation “will hold the U.S. Treasury accountable for educating Main Street businesses on reporting responsibilities to prevent small businesses from being penalized for not complying with new requirements when they have not even been informed.” The current version of the bill requires FinCEN to provide quarterly reports to Congress on the number of BOI Reports filed. There is no indication as of yet what the U.S. Treasury’s obligations to educate might look like.

[i] Codified as 31 U.S.C. §5336.

[ii] Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (September 30, 2022).

[iii] 31 C.F.R. § 1010.380 (2022).

[iv] USCA11 Case: 24-10736 Document: 71 Date Filed: 06/14/2024 Page: 1 of 1

[v] The median time interval between oral argument and last opinion or final order for civil appeals in the Eleventh Circuit was 4.3 months for the 12-month period ending September 30, 2023. United States Courts, Table B-4A, https://www.uscourts.gov/sites/default/files/data_tables/jb_b4a_0930.2023.pdf

[vi] FinCEN, Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), Mar. 4, 2024.

[vii] A copy of the letter is available on the website of the S Corporation Association, https://s-corp.org/wp-content/uploads/2024/04/FINAL-4-29-24-Joint-Trades-Letter-CTA-Repeal.pdf

Author: Natasha Bhushan