Following a suit brought by the National Small Business Association (and small business owner Isaac Winkles) against the US Treasury Department, Judge Liles C. Burk, of the United States District Court, Northern District of Alabama, ruled on Friday March 1, 2024, that the Corporate Transparency Act (CTA) requiring companies to report extensive stakeholder ownership information to the government is unconstitutional.
The court opined that the CTA’s requirements “cannot be justified as an exercise of Congress’ enumerate powers” because it “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.
In general, companies that have a reporting obligation under the law (see our article on How the Corporate Transparency Act Will Impact Small Business ) are required to provide certain information on both the company, beneficial owners, and the entity applicant including names, addresses and identification numbers. Reporting entities formed before December 31, 2023, have until December 31, 2024, while entities formed in 2024 have an earlier filing date. FinCEN, the agency overseeing the administration of the reporting requirements, estimates that over 32 million entities will be required to report during 2024 and five million entities will need to report thereafter.
What does this ruling mean for most small business entities?
What does this ruling mean for most small business entities falling with the CTA’s reporting requirements currently? Well, FinCEN for its part announced that it will not currently enforce the CTA against the plaintiffs. For all others, however, planning to comply with the CTA’s provisions may be the prudent approach, although there remains time to comply for those entities formed before 2024. While the decision is likely to be appealed to the Eleventh Circuit Appeals Court and then possibly even to the Supreme Court, that process could take months to resolve, and penalties for non-compliance can be steep.
Note that the CTA is not a tax-related reporting required under the Internal Revenue Code; businesses with questions are encouraged to discuss the matter with their legal counsel.
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