On March 1, 2024, the U.S. District Court for the Northern District of California, Northeastern Division, ruled that the Corporate Transparency Act (“CTA”) is unconstitutional. The case was brought by the National Small Business United d/b/a National Small Business Association and Isaac Winkles, an individual who owns a beneficial interest in a business that the CTA may cover.
The U.S. Government argued that the CTA was constitutional for the following 3 reasons:
- Congress has the power to enact the CTA under its foreign affairs powers;
- Congress has the power to enact the CTA via its Commerce Clause authority; and
- The CTA is a necessary and proper exercise of Congress’s taxing power since one of the purposes of the FinCEN created database created by the CTA is to assist in the efficient tax administration.
The Court did not find any of these reasons persuasive. The Government appealed the Northern Alabama Court ruling on March 11, 2024. Because it may take a few months before we have a decision from the appellate court, and its decision may be appealed to the U.S. Supreme Court, it may be over a year before businesses get some clarity on whether or not they should comply with the CTA by filing a CTA report. So, what should business owners and those who have beneficial ownership in a business entity covered by the CTA Do?
Here are two primary options:
- Do nothing and wait. One pro of this option is that save money by not paying your attorney to file your report (note: do not use an accountant to file your report, as many legal issues should be considered, which can only be addressed by a competent private corporate counsel or business lawyer). Another pro is that you keep your information semi-private, for now. The obvious con of this option is that you run the risk of violating the CTA. If the Alabama Court’s opinion is reversed and this reversal is upheld by the U.S. Supreme Court, then you may face civil and criminal penalties. The chances are, however, that the Government may provide a grace period while the cases go through the court system.
- File the CTA report. One argument for this option is that if you do not have anything to hide, there is no harm. For many businesses and business owners, there may not be any risk associated with filing the report now, as the Federal Government already has access to the information they gather through the CTA report. Therefore, one pro is that the risk is non-existent or negligible. Another pro for fling now is that you get over with and do not have to worry about complying later if the appellate courts rule that the CTA is constitutional. One con, of course, is the financial costs of complying. Another con is the feeling of losing your privacy.