Last week, a District Court Judge in the Northern District of Alabama issued a verdict stating that the Corporate Transparency Act (CTA) is unconstitutional. In general, the CTA became effective January 1 and was an attempt by the U.S. Congress to stop money laundering. Accordingly, the CTA would end the use of anonymous shell companies and track the flow of illicit money, protecting national security interests. All in all, this would occur by creating a beneficial ownership database and reporting requirements set by the Treasury Department. The CTA was not the only federal rule delayed within the past month. On February 22, another district court delayed the effective date of the National Labor Relations Board’s 2023 joint employer rule.

 Background of the Corporate Transparency Act

As has been noted, the CTA created a beneficial ownership database. This type of database would have been similar to databases used in the United Kingdom and the European Union. The Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury would keep this information. Chiefly, according to FinCEN, a beneficial owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

  • exercises substantial control over the company; or
  • owns or controls not less than 25% of the company’s ownership interests.

Subsequently, every beneficial owner would need to supply the following:

  • full legal name;
  • date of birth;
  • current residential or business street address; and
  • a unique identifying number from an acceptable identification document (passport, driver’s license, or other government issued identification document) or a FinCEN identifier.

According to The Wall Street Journal, the CTA “focuses primarily on small and private companies and applies to more than 32 million small businesses nationwide.” Specifically, the CTA requires companies with 20 or fewer full-time employees and less than $5 million in sales to submit the information to FinCEN. Law enforcement agencies can then access that information to investigate financial crimes.

 Corporate Transparency Act Injunction

Shortly after Congress passed the CTA in November 2022, the National Small Business Association filed a lawsuit against the Treasury. Overall, the lawsuit argued that the CTA was unconstitutional because it infringed on the protected rights of state sovereignty, privacy, and due process. In the March 8 ruling, the District Court judge sided with the group. Particularly, the judge raised questions about the corporate formation requirements imposed by the CTA. Markedly, as stated in the final ruling, that process is usually left to state governments. The judge also ruled that the CTA’s ownership disclosure requirements gave the government “unfettered legislative power.”

 Employer Takeaways

In conclusion, although the U.S. Treasury Department will likely appeal the district court ruling, small businesses initially covered under the Corporate Transparency Act are no longer required to submit ownership information for these purposes. Meanwhile, business owners can focus on staying in compliance with the five employment laws that all companies should know.