In 2021, Congress passed the Corporate Transparency Act (CTA), marking a significant step toward enhancing transparency within the U.S. corporate landscape. Administered by the Financial Crimes Enforcement Network (FinCEN) of the United States Treasury Department, the CTA aims to shed light on the ownership structures of a wide array of business entities, including U.S. and foreign limited liability companies (LLCs), corporations, limited partnerships, and other closely held entities. Effective from January 1, 2024, the act mandates that many entities, both formed in the U.S. and those registered to do business within its borders, report detailed information on their beneficial owners.
The definition of “beneficial owners” under the CTA is broad, encompassing any natural persons who either directly or indirectly control a significant portion (25% or more) of the equity interests in a corporate entity or who have substantial control over the entity’s operations. Legal firms, such as Montague Law, engaged in submitting Beneficial Ownership Reports on behalf of their clients, must now gather personal information about these owners, including names, addresses, and details about the reporting company.
The introduction of the CTA has sparked a debate on privacy and constitutional rights, leading to significant legal challenges. A notable case unfolded when an Alabama federal district court, led by Judge Liles C. Burke, declared the CTA unconstitutional in the National Small Business United v. Yellen decision. The court’s ruling questioned Congress’s authority to enforce such sweeping requirements on state law entities, emphasizing a perceived overreach that exceeds the Constitution’s limits on the legislative branch.
The case brought forth by the National Small Business Association and its member, Issac Winkles, against the Treasury Secretary and the Acting Director of FinCEN, challenged the CTA’s mandates on multiple constitutional grounds. The plaintiffs argued that the CTA’s disclosure requirements exceeded Congress’s authority under Article I of the Constitution and violated several fundamental amendments.
The government defended the CTA by citing its authority under various clauses, including foreign affairs powers, the Commerce Clause, and taxing powers. However, the court found these justifications lacking. It concluded that the act’s requirements do not fall within the scope of regulating interstate commerce, nor are they justified by national security concerns or taxation purposes.
In response to this landmark decision, FinCEN announced
it would comply with the court’s order and temporarily halt the enforcement of the CTA against the plaintiffs. This decision leaves other entities in a state of uncertainty regarding their obligations under the CTA. The legal landscape continues to evolve as further challenges and interpretations of the CTA emerge. Montague Law remains at the forefront, providing expert guidance to navigate these complex regu
