On Friday, March 1, a Federal District Court Judge in Alabama ruled that the Corporate Transparency Act (CTA) is unconstitutional. This ruling is a result of the National Small Business Association (NSBA) and Isaac Winkles, an NSBA member, filing a lawsuit against the Treasury Department on November 15, 2022. They claimed that the CTA creates a burden on small businesses by requiring them to disclose “highly personal” information to FinCEN, the Financial Crimes Enforcement Network of the U.S. Department of Treasury, intended to prevent and punish financial crimes.

The NSBA and Winkles also argued that small businesses might face hefty expenses – up to $8,000 in the first year of compliance – to meet the new CTA requirements.

The Corporate Transparency Act (CTA) went into effect on January 1, 2024, and it is intended to enhance transparency in entity structures and ownership, and to combat money laundering, tax fraud, and other illicit activities. A key development of the CTA is the Beneficial Ownership Information reporting requirement, which requires most U.S. entities (primarily small and medium size businesses) to report “beneficial ownership” information to the FinCEN. Read our February 2024 Insight for more information about the Beneficial Ownership Reporting requirement here.

What does this mean?

The decision prevents the government from enforcing the CTA against the Plaintiffs, and other similar actions may follow. However, this does not mean that the CTA is stopped, and the federal government is highly likely to appeal the Alabama case. The appeal process could take years. In the meantime, businesses and business owners should continue to comply with the Act.

Dembo Jones P.C. will continue to monitor the effect of this ruling and the impact it may have.