A few months ago, word was slowly spreading about the federal government’s new requirements under the Corporate Transparency Act (CTA) that business must disclose information about the beneficial ownership structure of corporations, limited liability companies, limited partnerships, and other entities in order to combat money laundering, fight criminal activity by individuals and organizations and promote efficient tax administration. Under the law, tens of millions of individuals are required to disclose their personal information to the government or face civil, criminal fines and potentially jail. Within months of this new law going into effect on January 1, 2024, lawsuits were filed challenging the constitutionality of this new law.
The first lawsuit was filed in the U.S. District Court for the Northern District of Alabama. That action was brought by a small business owner and an organization of business owners who argued that the mandatory disclosure of the information required by the statute exceeded Congress’s authority under the Constitution, specifically Article I, the First, Fourth, Fifth, Ninth and Tenth Amendments. The District Court held the following:
• The business owner and the business association had the standing to challenge the law;
• The statute exceeded the Constitutional limits of Congress;
• There was a lack of a nexus between Congress’ enumerated powers as a necessary or proper means of achieving Congress’ policy goals;
• The CTA does not fall within Congress’ foreign affairs and national security powers;
• The statute does not explicitly address commerce and determined that entity formation is not a commercial activity that substantially affects interstate commerce, so Congress lacks the power to regulate formation under the Commerce Clause; and
• That the statute is not permitted under Congress’ taxing power or the Necessary and Proper clause as the connection was too weak.
Interestingly, the Court did not base its decision on the Fourth and Fifth Amendment.
WHAT THE ALABAMA DECISION MEANS
As a result of this decision, the plaintiffs in the Alabama case were granted an injunction and were not required to register with FinCEN. FinCEN immediately filed a notice of appeal with the Eleventh Circuit challenging the Court’s decision and all parties have requested that the review be expedited, which has been granted. FinCEN also announced that its’ position was that the injunction only applied to those plaintiffs and thus, any and all other individuals or businesses must comply with the statute. Most legal scholars and practicing lawyers have advised that any individual who creates or forms an entity after January 1, 2024 is still required to register with FinCEN within ninety (90) days of formation. Any person who created an entity before January 1, 2024 has until January 1, 2025 to register with FinCEN and as such, some attorneys are advising their clients to register with FinCEN while others have advised clients to wait.
MICHIGAN, OHIO, AND MAINE – MORE LAWSUITS
Individuals and organizations in Alabama are not the only ones challenging the Corporate Transparency Act. New Plaintiffs filed suits in the federal district courts in Michigan, Ohio, and Maine, again challenging the Corporate Transparency Act. The Michigan case specifically raises claims that the statute violates the Fourth and Fifth Amendment. In the Maine case, the Plaintiff mirrors many of the challenges raised in the Alabama case. The plaintiff argues that the Corporate Transparency Act infringes on state sovereignty in chartering and governing corporate entities which is the purview of the states; Congress overreached its authority and exceeded its enumerated powers and the statute has no relations to foreign affairs or national security, and that the statute infringes on individual rights by compelling individuals to disclose sensitive personal information. In Ohio, the group challenging the statute involves an individual lawyer and a legal professional association. In that action, the Plaintiffs have requested a nationwide injunction against the enforcement of the statute which, if granted, would mean that the obligation to register with FinCEN would not exist. To date, the Courts have not issued decisions in Maine, Ohio, or Michigan.
GOING TO THE SUPREME COURT?
Depending on how the various District Courts rule, whether the losing parties appeal such decision and the Eleventh Circuit’s decision in the Alabama case appeal, there could be a split among the various circuit courts as to the constitutionality of the Corporate Transparency Act. With a split between the various circuits on the constitutionality of this law, it is reasonable to expect that this issue could go to the Supreme Court. Whether there will be a divide between and among the various circuits is unknown at this juncture, but the possibility looms large.
WHAT SHOULD YOU DO?
While a lot of attention has been focused on the Alabama decision and the Judge’s finding that the law is unconstitutional, the Court’s ruling does not mean that the Corporate Transparency Act is dead. For the vast majority of individuals, they are still required to comply with the registration requirements under the statute. For any entities that are created after January 1, 2024, the beneficial owner and reporting company (as defined in the statute) MUST register with FinCEN within ninety (90) days of forming the entity. We continue to advise our clients that new entities that are formed must register with FinCEN, and we continue to collaborate with our clients to oversee such registration. For entities that were formed before January 1st, 2024, their obligation to register has a deadline of January 1, 2025 for such registration. This gives these clients several more months. We are working with each of our clients to evaluate on an individual basis whether it is prudent to register with FinCEN now or delay registration while these matters work through the Courts. It is important for individuals to remember the deadline and be prepared to file before January 1, 2025 and consider the ramifications of waiting until the fourth quarter of the year to register. As noted, this statute applies to over thirty-two million entities and there may be a flurry of registrations as year-end approaches. Absent further determination by the Courts on this issue, the Corporate Transparency Act is alive.
