CTA Blocked for Plaintiffs and Current NSBA Members After District Court Ruling

In a September 2023 client alert, we explained the beneficial ownership reporting requirements under the Corporate Transparency Act (CTA), which went into effect on Jan. 1, 2024. On March 1, in National Small Business United et al.  v. Janet Yellen et. al., the U.S. District Court for the Northern District of Alabama held those requirements unconstitutional and enjoined enforcement of the CTA against the plaintiffs in that action.

What did the court decide?

The court held that the CTA is unconstitutional because it lacks “a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” The court found that the CTA’s requirements exceed Congress’ authority to regulate interstate commerce and are not a necessary and proper exercise of its foreign affairs or taxing powers. Accordingly, the court blocked the Financial Crimes Enforcement Network (FinCEN) from enforcing the CTA against the plaintiffs who brought the action.

Who does it impact?

In response to the decision, FinCEN issued a notice on March 4, 2024, confirming that, for now, it will not enforce the CTA against the plaintiffs in the action – Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association as of March 1, 2024. FinCEN will continue enforcing the CTA against all other reporting companies who were not plaintiffs in the action. 

What happens next?

If the government appeals the decision to the U.S. Court of Appeals for the Eleventh Circuit and seeks an order to stay the injunction pending appeal, the grant or denial of a stay could be resolved in a matter of weeks, but the timing of a final decision is uncertain. In the meantime, other small business owners or trade groups like the NSBA may file suit in other federal courts seeking to enjoin FinCEN from requiring them to provide beneficial ownership information under the CTA.

What should I do?

As noted above, the injunction against enforcement of the CTA’s requirements only applies to the plaintiffs in the action, including the members of the NSBA as of March 1, 2024. Until further guidance is provided, reporting companies should continue to comply with the CTA’s reporting requirements within the applicable reporting periods. Phelps will continue monitoring the decision, additional actions that may be filed, and FinCEN’s response.

Please contact Hal West, Trevor Haynes or any member of Phelps’ Business team with questions or for advice and guidance.