The CTA ruling: implications for beneficial ownership reporting in the wake of legal challenges

Article | April 30, 2024

Authored by Weinlander Fitzhugh

In 2021, the Corporate Transparency Act (CTA) was enacted to combat financial crimes by requiring U.S. and foreign entities to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). This measure aimed to enhance law enforcement’s ability to investigate money laundering activities. 

In November 2022, the National Small Business Association (NSBA) and Isaac Winkles filed a lawsuit in the U.S. District Court for the Northern District of Alabama, claiming that the CTA unfairly burdened small businesses. On March 1, 2024, the court ruled in favor of the plaintiffs, declaring the CTA unconstitutional. The decision has introduced confusion and uncertainty among many business owners.

In this article, we’ll briefly discuss the court’s ruling and what it means for business owners, including whether they need to comply with beneficial ownership reporting requirements going forward. 

The court’s ruling

In the court’s decision, District Judge Burke determined that the CTA exceeded Congress’s legislative powers listed in the Constitution. The ruling highlighted that the authorities cited by the government, such as control over foreign affairs, national security, and interstate commerce, did not justify the CTA’s requirements. 

The court also prohibited enforcement of CTA provisions against the plaintiffs specifically, including certain members of the NSBA. While the decision calls the CTA into question and exempts some from compliance, it is very limited in scope.

Implications for business owners

Judge Burke issued an order prohibiting FinCEN from enforcing the CTA against the plaintiffs, which included members of the National Small Business Association (NSBA). This means a small number of beneficial owners who were members of the NSBA as of March 1, 2024, may be affected. 

However, the vast majority of beneficial owners of U.S. businesses are still under the mandate to file beneficial ownership information (BOI) with FinCEN. 

Additionally, a number of states have passed legislation requiring ownership reporting similar to the CTA. This ruling does not affect those state laws, so many may still be required to comply with both state and federal reporting obligations. 

The Department of Justice and FinCEN quickly filed a notice of appeal after the Alabama court ruling, so the CTA debate will continue. FinCEN has clarified it will continue to enforce the CTA amidst ongoing litigation. The government may also request a stay of the court’s ruling pending the outcome of the appeal, meaning the CTA would still be enforceable against the plaintiffs until the United States Court of Appeals for the Eleventh Circuit renders a decision. 

In sum, the long-term compliance environment remains uncertain. The Northern District of Alabama is one of 94 federal district courts and is subject to appeal in the 11th Circuit, which is one of thirteen federal appellate courts. The progression of this legal challenge and the potential involvement of other federal circuits could extend the period of uncertainty, and a final resolution could be years away. 

The Act’s Broader Impact and Future

The recent court ruling could signal changes ahead. While the current decision only affects a small fraction of businesses, other business owners should keep an eye out for future changes. Developments in other courts or legislative amendments could change compliance obligations. 

Given the current legal ambiguity, businesses, especially those newly formed or nearing reporting deadlines, must stay informed about any changes that could impact their reporting obligations. 

For entities established after January 1, 2024, the CTA mandates that BOI be reported to FinCEN within 90 days of formation unless covered by an exemption. Entities in operation on or before December 31, 2023, face a deadline of January 1, 2025, for submitting their beneficial ownership filings. Given the number of entities potentially affected, most businesses should proactively prepare for these submissions well ahead of the deadline. 

Regardless of the ongoing legal challenges, the safest course for businesses is to prepare as though they will need to comply. Collecting beneficial ownership information in advance mitigates the risk of non-compliance, which can carry significant penalties. 

If your business is not required to report, the effort you put into gathering this information is not wasted but rather a prudent measure in risk management. The key takeaway for businesses is to remain adaptable, consult with experts, and prepare diligently for compliance.

Importance of Professional Guidance

If you have any questions or concerns about CTA compliance, it’s wise to speak with legal and financial advisors. Professionals can offer tailored advice, ensuring you understand your obligations, identify applicable exemptions, and remain compliant. For more information, please contact our office.