Alabama's Ruling Declares Corporate Transparency Act Unconstitutional

On March 1, 2024, the U.S. District Court for the District of Alabama ruled that the Corporate Transparency Act (CTA) is unconstitutional, in favor of the National Small Business Association (NSBA), in favor of the National Small Business Association (NSBA). In his 53-page ruling, Judge Liles C. Burke determined that the CTA overstepped the bounds of Congress's authority under the Constitution's Commerce Clause.

There have been varied reactions to the case, with a general consensus that the Justice Department will appeal to the Eleventh Circuit Court of Appeals, and varied opinion on whether the ruling extends past the NSBA and how the government will respond. The ruling focused on the Commerce Clause, which allows Congress to regulate interstate commerce. Although there were arguments about the CTA violating other aspects of the Constitution, Burke concluded:

"The Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers. This conclusion makes it unnecessary to decide whether the CTA violates the First, Fourth, and Fifth Amendments."

The ruling specifically applies to the NSBA and its members. The looming deadline for filing is March 31st for companies created on January 1st, 2024. FinCEN has explicitly noted that they will continue to require filings from all other businesses:

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.

The judge's argument maintains that Congress's power under the Commerce Clause does not extend to regulating entire class of entities based solely on the use of commerce channels and instrumentalities by some members of that class. He specifically states, when comparing to California Bankers Assn. v. Shultz, 416 U.S. 21, 94 S. Ct. 1494 (1974):

The word "commerce," or references to any channel or instrumentality of commerce, are nowhere to be found in the CTA.

He also mentions, referencing American Power & Light Co. v. SEC, 329 U.S. 90 (1946):

Thus, the Government misses the mark when it argues that the Commerce Clause allows Congress to regulate an entire class just because some members of the class use the channels and instrumentalities of commerce.

The ruling repeatedly makes the point that the CTA is too broad and does not relate directly enough to regulating commerce to make it constitutionally sound. The decision is widely thought to be overturned in a higher court.

We expect many attorneys will want to wait to file their client's beneficial ownership information with FinCEN until the last minute, to avoid over-reporting to the government.

To help you manage this, we are introducing Scheduled Filings. It works seamlessly with your practice:

1. Your firm adds a company and it's beneficial owners to our platform, including the business formation date.

2. Our platform automatically calculates the deadline for the filing and lets you schedule in advance, three days before the deadline.

3. As the date approaches, we will send reminders to beneficial owners to upload their identity information to our platform, including the estimated date that they are required to file.

4. If, at any time, the planned filing is cancelled or delayed, we offer on-demand identity data redaction, which immediately removes all sensitive identity information from our systems, as well as our third-party identity collection partner, Stripe.

Your firm only pays when a filing is successfully submitted to FinCEN. This helps you manage your compliance burden while giving time for clients to wait to provide identity information to the government, until their compliance requirements are cleared up.