Corporate Transparency Act Ruled Unconstitutional by Federal District Court

The act requires expanded disclosures about ownership of small businesses.

March 07, 2024

On March 1, the U.S. District Court for the District of Alabama declared the Corporate Transparency Act (CTA) unconstitutional, “a pivotal moment in the ongoing discourse on corporate transparency and privacy rights,” reported Forbes magazine.

The central issue is whether small businesses should be required to report details on their owners and others who benefit from the business.

Judge Liles C. Burke determined that the CTA "transcends the limits imposed by the Constitution on the legislative branch and lacks a strong connection to any enumerated power to serve as a necessary or appropriate means to achieve Congress’ policy objectives."

“This initial triumph for the interests of small businesses could have far-reaching effects, potentially impacting the reporting obligations of numerous U.S. business entities,” Forbes wrote.

The Wall Street Journal and the Associated Press also covered the ruling, with the AP noting that “the National Small Business Association filed suit in November 2022 to block the requirement that tens of millions of small businesses register with the government as part of an effort to prevent the criminal abuse of anonymous shell companies. The small business lobbying group argued that the reporting rule violates the Constitution, saying it is unduly burdensome on small firms, violates privacy and free-speech protections and infringes on states’ powers to govern businesses.”

The Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department, is tasked with enforcing the CTA. FinCEN has taken the position that Judge Burke’s ruling only prevents it from enforcing the CTA against the specific plaintiffs in the case, essentially anyone who was a member of the National Small Business Association as of March 1, 2024. Under this interpretation, all other small businesses covered by the CTA must still comply. Established businesses have until the end of the year to provide the required ownership disclosures, but any new entities which would fall under the CTA have only 90 days to comply. 

In February, NACS Daily shared details about the CTA requirements. NACS is a member of the S-Corp Association, which has been working to get a one-year delay on the CTA and suspended enforcement during the court process.