The Corporate Transparency Act (CTA), a federal law that requires most U.S. businesses to report beneficial ownership information to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) went into effect January 1, 2024, and is already facing legal challenges and questions surrounding its scope. Notwithstanding, the law remains in full force and effect and clients are encouraged to file the reports before the end of the year deadline.
Legal Challenges
There are currently at least six pending federal lawsuits challenging the constitutionality of the CTA on various grounds. The most prominent is a federal district court case in Alabama, where the court concluded that the CTA unconstitutionally exceeds Congress’s enumerated powers (though the court’s order is limited to the parties in that case). The government appealed the district court’s decision, and the Eleventh Circuit heard oral argument on September 27, 2024. We are now awaiting a ruling on this case after oral arguments are considered. The key issues raised during oral arguments were privacy concerns and protection of sensitive information, constitutionality of the reporting requirements under the Fourth Amendment, and undue burden on small entities. Likewise, there have been questions about whether FinCEN’s rollout of guidance and resources has been sufficient to prepare businesses for this filing requirement, and whether enforcement should be delayed until clearer implementation and compliance tools are established.
In addition to the foregoing, there are complaints pending in federal district courts in Texas, Oregon, and Michigan, among other, challenging the constitutionality of the CTA. Assuming some of courts find the CTA constitutional while others do not, there could be a Circuit Court split, which could bring the issue up to the United States Supreme Court.
Potential Outcomes
Most legal experts feel that the CTA will survive the constitutional challenges. Courts have traditionally upheld financial reporting laws when tied to legitimate regulatory purposes.
However, the court may push FinCEN to strengthen data security protections or refine the scope of who must report. The court may also grant some form of relief for small businesses, either by adding exemptions or giving FinCEN more time to prepare for full implementation of the law. Another potential outcome is a temporary injunction that delays enforcement until privacy and security concerns are fully addressed.
Continuing Adherence to Deadlines
FinCEN has been very clear that despite any rulings to date, reporting companies (other than the plaintiffs in the Alabama case) should continue to make timely filings and we at SSK likewise continue to recommend to our clients that they timely file.
As a reminder, the following deadlines apply to all reporting companies: (a) reporting companies formed before January 1, 2024 must file before January 1, 2025; (b) reporting companies formed after January 1, 2024, must file within ninety (90) days of formation; and (c) reporting companies formed after January 1, 2025, must file within thirty (30) days of formation.
The penalties for willfully failing to file are harsh, so your compliance is highly encouraged. If your entity was in existence prior to January 1, 2024 and you have not yet filed your beneficial owner report with FinCEN, please contact us immediately so that we can ensure you meet the deadline.
Scherer Smith & Kenny LLP remains available to assist you with these and any other questions you may have related to your business. For the most current news and information as it relates to the CTA, please use the following link: https://fincen.gov/boi or contact Heather Sapp at [email protected] for assistance.