The Corporate Transparency Act (CTA) is a law that has been much debated since it went into effect in 2024. Because the CTA impacts many of our clients, our firm keeps close watch on the law as it evolves and will share knowledge of important developments.
Our previous blog explains the CTA in detail, but the short story is it requires businesses to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). This is supposed to help combat financial crimes such as money laundering.
However, the law has been declared unconstitutional by the District Court for the Northern District of Alabama, with the reasoning that it oversteps federal powers and infringes on constitutional rights.
More recently, on September 27, 2024, the Eleventh Circuit Court of Appeals heard arguments in the appeal of National Small Business United v. U.S. Department of Treasury, the case challenging the constitutionality of the CTA.
Here’s a summary of what happened and where the CTA stands currently:
Commerce Clause Debate
The appeal is based on the question of whether Congress had the authority to enact the CTA under the Commerce Clause.
The government argued that the CTA is part of a broader plan to prevent financial crimes, which affect interstate commerce. The government emphasized that corporations are inherently engaged in economic activity, and the law is intended to target those entities that could be used to facilitate money laundering and other illicit activities.
On the other side of the table, National Small Business United (NSBU) argued that not all entities formed under state law engage in commerce, and some may exist solely for purposes unrelated to business, such as holding property in a trust. NSBU further argued that the CTA is an unconstitutional overreach because it regulates entity formation, which traditionally falls under state jurisdiction, not federal authority.
The judges on the Eleventh Circuit panel appeared skeptical of NSBU’s argument. One judge noted that businesses fundamentally exist to engage in economic activities, stating that entities that “just sit there” is NSBU’s best hypothetical.
To reinforce its position, the government further pointed out that foreign entities are only required to report under the CTA if they engage in business within the U.S. Additionally, certain entities are excluded from filing because they already have reporting requirements. Plus, there is a continuing reporting requirement under the CTA. All of these points strengthened the government’s argument that the law targets economic activity, not mere formation.
Facial Challenge Standards
However, the key issue in the case is how NSBU challenged the CTA, a facial challenge, and the standard that applies. Under a facial challenge, NSBU must show that the CTA is always unconstitutional, in every application. As you might guess, a facial challenge is a very high standard to meet.
The government contended that the CTA has many valid applications, particularly for companies engaged in interstate commerce, and NSBU had not sufficiently demonstrated that it was unconstitutional in every instance.
NSBU attempted to argue a different standard, claiming that because the law exceeded Congress’ powers, it should be invalidated entirely. However, the judges questioned whether this interpretation aligned with the Eleventh Circuit’s precedent on facial challenges.
Fourth Amendment Concerns
NSBU also raised a Fourth Amendment argument, claiming that the CTA’s reporting requirements amount to unreasonable search and seizure. Specifically, the plaintiffs argued that because federal and foreign law enforcement agencies can access FinCEN’s database without a warrant or reasonable suspicion, this violates constitutional protections against broad, unwarranted searches.
The Eleventh Circuit panel appeared unconvinced by this argument and described the claim as “really far-reaching,” noting that many regulatory frameworks require disclosure of information to the government and that Fourth Amendment challenges are typically reserved for individualized searches, rather than broad regulatory requirements.
The government emphasized that the CTA’s requirements are limited to a narrow set of information, primarily focused on preventing financial crimes, and do not raise Fourth Amendment concerns. The panel suggested that this argument might be better addressed by the district court on remand.
What’s Next?
The Eleventh Circuit is deliberating the case, and a decision will likely be handed down before the end of the year. The Court may reverse or uphold the district court’s decision, after which the case could be appealed to the Supreme Court. It is also possible that the case could be remanded to the district court for further consideration, particularly on unresolved issues like the Fourth Amendment claim.
Our Recommendation for CTA Filings
While entities created after January 1, 2024, may consider delaying compliance with the CTA’s reporting requirements until a final decision is made, the outcome will likely take longer than the required filing period of 90 days. In other words, you risk noncompliance if you wait to file. We advise that you proceed as if the CTA will remain in effect. Additionally, there is a bill introduced in the United States House that is currently in committee that would extend the reporting deadline for entities created prior to January 1, 2024, to December 31, 2025.
The CTA is complex and ever-changing. If you need legal advice on how your organization should handle the CTA, contact us.
