On March 1, 2024, the U.S. District Court for the Northern District of Alabama held that the Corporate Transparency Act is unconstitutional. Specifically, the court found that enactment of the CTA could not be justified as an exercise of Congress’ enumerated powers set forth in Article I of the Constitution. As a result, the court held that Congress lacked authority to enact the CTA and that the CTA cannot be enforced against the plaintiffs in that litigation. The CTA task force at Warner has reviewed the court’s opinion and its effect on companies who are preparing for CTA compliance. Here’s what you need to know.
One court found that the CTA is unconstitutional. Expect more litigation.
This is the first time a federal court has ruled that the CTA is unconstitutional. We expect significant additional developments in litigation involving the CTA, including an appeal of the Alabama case to the Eleventh Circuit Court of Appeals. Given the success of this litigation, we expect that additional challenges to the CTA may be filed in other jurisdictions.
The CTA remains in effect.
The Alabama court ruled that the CTA cannot be enforced against the specific plaintiffs in the litigation before the court – the National Small Business Association, an Ohio-based nonprofit that represents its small business members, and Isaac Winkles, an individual small business owner. On March 4, FinCEN issued a statement confirming that it will not enforce the CTA against Winkles, the NSBA or any individual or entity that was a member of the NSBA as of March 1, 2024. While this ruling is significant, it does not provide a justification for any other individuals or companies to stop complying with the CTA.
Entities facing a near-term CTA reporting deadline should continue preparing reports.
The CTA took effect on January 1, 2024. Any entity formed during 2024 must file its first beneficial ownership information (BOI) report under the CTA within 90 days after formation. As a result, entities formed in early January will need to file BOI reports in early April of this year. We do not expect that the CTA will be definitively overturned by that time. If you are facing a CTA deadline in the next few weeks or months, expect that you will need to submit your report and prepare accordingly. More information on CTA reporting is available here.
Entities with a year-end deadline should expect to report but may wish to wait to monitor further developments.
For most companies, CTA compliance is not a particularly heavy lift. BOI reporting is fairly straightforward and FinCEN has provided numerous resources to help companies identify their “beneficial owners” and understand the information that must be reported. However, entities with complex ownership structures and/or individuals holding interests in a large number of CTA reporting companies may need to invest significant time and resources in understanding their CTA reporting obligations and gathering the required information. Before making a substantial investment, clients in this position may wish to take a “wait and see” approach as CTA litigation continues. Our understanding as to the likelihood that the CTA will or will not remain in effect by the time we reach year-end will likely grow clearer as we approach the third quarter of 2024.
We’re here to help.
Warner’s CTA task force is continuously monitoring developments and will provide updates as additional litigation continues. In the meantime, we are available to assist clients with CTA reporting obligations. Warner’s Corporate and Trusts and Estates Practice Groups are hosting a complimentary webinar this Wednesday, March 6, to provide practical advice for CTA reporting and compliance. If you have any questions about how the CTA impacts your company, please reach out to Corinne Sprague, Loren Andrulis or to your Warner attorney.
