As the calendar turned to the new year, small business owners across the U.S. faced a new challenge, the introduction of the Corporate Transparency Act (CTA). Created by the U.S. Department of Treasury in September 2022, this regulation mandated corporations and LLCs submit a beneficial ownership information report (BOIR) to the Financial Crimes Enforcement Network (FinCEN), with implementation to begin January 2024. The purpose of this new regulation was to hinder business entities from getting away with illegal or improper business practices, protect national security, and prevent criminals from harming our financial systems through illicit business transactions.
A Rocky Start
Only two months following its implementation, a federal judge found the act unconstitutional. Alabama U.S. District Court Judge Liles Burke held that the CTA exceeded the legislative branch's constitutional boundaries. However, the holding is limited to the plaintiffs in the case and the vast majority of small businesses should still expect to file this year.
The Core of the Judgement
Under the Alabama federal court's rationale, none of the powers given to Congress in the Constitution allow it to enforce the CTA. The government argued that it had the power under the Commerce Clause and its foreign affairs and national security powers, among others, but Judge Burke was unconvinced. For example, Judge Burke explained that the CTA would be allowed under the Commerce Clause if it had limited reporting requirements to LLCs or corporations engaged in interstate commerce. Since business entity formation is squarely in the realm of state powers, however, and it applied to all businesses, not just those engaged in interstate commerce, Judge Burke held that the CTA cast too wide a net to be constitutional.
Practical Implications for Small Business Owners
Does this mean business owners are off the hook on BOIR requirements? The short answer probably not, at least for now. When a regulation is found unconstitutional by a federal lower court it is, in essence, put on hold. This is because the government typically appeals any such decision and asks for a stay of judgment.
In addition, FinCEN has already issued a statement that it considers the decision as only applying to the plaintiffs. In this case, the plaintiffs were a small business owner named Isaac Wilkinson and members of the National Small Business Association. This is a tiny percentage of the overall number of businesses required to file.
While they can continue to conduct business as usual without fear of the exorbitant penalty of up to $500 per day, the same is not true for most small businesses across the country. They must continue to file a BOIR or face penalties for its violation.
What Lies Ahead
As for the future of the CTA, business owners across the U.S. will have to take a wait-and-see approach. The decision of the ruling court is extremely limited, and as yet there is no other litigation pending regarding the constitutionality of the CTA. The district court's decision could also be overturned on appeal. For now, small business owners must watch how the courts navigate the Corporate Transparency Act and plan accordingly.
Related Resources
- New Federal Reporting Requirements for Small Business Owners (FindLaw’s Law and Daily Life)
- What Is the New Beneficial Ownership Information Report Requirement for LLCs and Corporations (FindLaw’s Learn About the Law)
- Challenging Laws: 3 Levels of Scrutiny Explained (FindLaw’s Law and Daily Life)
