According to a Federal Court in the Northern District of Alabama in National Small Business United v. Yellen, the Corporate Transparency Act (CTA) is a well-intentioned law enacted by Congress but it violates the US Constitution.

The Corporate Transparency Act (CTA) mandates that most LLCs and corporations incorporated under state law in the United States disclose personal shareholder information to the United States Department of the Treasury's Financial Crimes Enforcement Network (FinCEN).

This new Beneficial Owner law in the United States aims to curb financial crimes such as money laundering and tax evasion, which are often conducted through shell corporations.

If you or someone you know owns or manages an LLC or Corporation in the United States, it's important for you to be aware of this law: it carries penalties of up to $10,000 and two years of imprisonment for non-compliance.

 On March 1st, 2024, a US Federal District Court Judge delivered a 53-page decision in National Small Business United v. Yellen, explaining why the CTA oversteps Congress's authority under the US Constitution.

The National Small Business Association challenged the CTA, asserting that it surpassed Congress's constitutional powers and breached various amendments to the US Constitution. They argued that the CTA's disclosure requirements placed an unreasonable burden on small businesses and individuals imposed by the Federal Government (it is important to note that LLCs and Corporations are incorporated under State Law).

The government defended the CTA, asserting that it fell within Congress's extensive powers to regulate commerce, manage foreign affairs and national security, and implement taxes and associated regulations. They maintained that the disclosure requirements were crucial for combating the abuse of corporate structures in unlawful activities, which considerably affect interstate and foreign commerce as well as tax administration.

This Federal Court decision highlights the complex balance of power between the Federal Government and the States, and outlines the potential limits of congressional power under the US Constitution.

The Court determined that the CTA surpasses the constitutional boundaries of the legislative branch and lacks an adequate connection (nexus) to any specified power to be considered a necessary or proper instrument for achieving Congress's policy objectives. Consequently, the Court issued a permanent injunction preventing the Treasury and FinCEN from applying the CTA against the plaintiffs.

FinCEN has issued a statement clarifying that they will refrain from enforcing the CTA solely with respect to the plaintiffs in National Small Business United v. Yellen while the court decision is effective.

This indicates that, as per FinCEN and the Federal Government, all other LLCs and corporations in the United States are still obliged to adhere to the CTA and the Beneficial Ownership Report Filings.

As currently written, this law would impose penalties of up to $10,000 and two years of imprisonment for non-compliance.

If you'd like to read more about the CTA and Beneficial Ownership Requirements you can read our article outlining this new law here. 

Della Torre Law, PLLC