On March 1, 2024, a federal district court in Alabama delivered a significant blow to the Corporate Transparency Act when Judge Liles C. Burke ruled that the CTA exceeds Congress's enumerated powers under the Constitution. The decision in National Small Business United v. Yellen declared the Act unconstitutional and enjoined the government from enforcing it against the plaintiffs in the case.[1] For the millions of businesses that are subject to the CTA's beneficial ownership information reporting requirements, the ruling created uncertainty about whether to file — and what happens if they do not.
Background: The Corporate Transparency Act
The Corporate Transparency Act, enacted as part of the National Defense Authorization Act for Fiscal Year 2021, requires most domestic and foreign entities registered to do business in the United States to report information about their beneficial owners to the Financial Crimes Enforcement Network. The stated purpose is to combat money laundering, terrorist financing, and other illicit activities by creating a federal database of the real persons behind shell companies and other opaque entities.[2]
Under the CTA and FinCEN's implementing regulations, a "reporting company" must file a beneficial ownership information report identifying each individual who directly or indirectly owns or controls at least 25 percent of the entity, or who exercises substantial control over the entity. Companies existing before January 1, 2024, were given until January 1, 2025, to file their initial reports, while companies formed after January 1, 2024, must file within 90 days of formation. Willful failure to file carries civil penalties of up to five hundred dollars per day and criminal penalties of up to two years in prison.
The Alabama Court's Reasoning
The plaintiffs in National Small Business United — the National Small Business Association and one of its members — challenged the CTA on the ground that Congress lacked constitutional authority to enact it. The government defended the statute under several theories, including the Commerce Clause, the Necessary and Proper Clause as applied to Congress's foreign affairs and national security powers, and Congress's taxing power.
Judge Burke rejected each of these justifications. On the Commerce Clause, the court found that the mere act of forming a company and existing as a legal entity does not constitute economic activity affecting interstate commerce. On the foreign affairs power, the court concluded that the CTA's sweeping application to purely domestic entities with no connection to foreign activity exceeded any reasonable interpretation of that power. And on the taxing power, the court noted that the CTA does not impose a tax and that its reporting requirements serve law enforcement rather than revenue purposes.[3]
The Limited Scope of the Injunction
It is critical to understand what the Alabama decision does and does not do. The court's injunction applies only to the specific plaintiffs: Isaac Winkles (the individual plaintiff), companies for which he is the beneficial owner or applicant, the National Small Business Association, and members of the Association as of March 1, 2024. For all other reporting companies, the CTA remains in effect and FinCEN continues to accept and require beneficial ownership reports.
The government promptly appealed the decision to the Eleventh Circuit Court of Appeals, and the case has attracted significant attention from other courts, legal commentators, and business organizations. Several other constitutional challenges to the CTA are pending in different federal courts, and it is possible that the issue will ultimately reach the Supreme Court.[4]
What Businesses Should Do Now
For business owners who are not members of the National Small Business Association and are not otherwise covered by the Alabama injunction, the practical advice remains the same: comply with the CTA's reporting requirements unless and until a broader injunction or legislative change provides relief. The penalties for non-compliance are substantial, and the current legal landscape does not support a general refusal to file based on the Alabama decision alone.
Business owners who are members of the Association should consult with counsel to determine whether they fall within the scope of the injunction and, if so, whether they should rely on it or file voluntarily as a precautionary measure. Filing voluntarily does not waive any constitutional objection, and the information can be updated or corrected if the legal landscape changes.
More broadly, the Alabama decision highlights the ongoing constitutional uncertainty surrounding the CTA. Business owners should monitor developments in the Eleventh Circuit appeal, the parallel challenges in other circuits, and any legislative proposals to modify or repeal the Act. The filing deadline for existing companies is approaching, and the cost of compliance — both in terms of professional fees and the burden of gathering beneficial ownership information — is a legitimate business expense that should be planned for regardless of the constitutional debate.