A federal court recently ruled that the Corporate Transparency Act (CTA) is unconstitutional. In a lengthy opinion issued on March 1, the US District Court for the Northern District of Alabama explained that the CTA may be a “smart law” that pursues “sensible and praiseworthy ends,” but it violates the US Constitution.

The court held that the CTA was authorized neither by Congress’ foreign affairs or taxing powers nor by its powers under the Commerce Clause or under the Necessary and Proper Clause. The case is National Small Business United, d/b/a National Small Business Association, et al. v. Janet Yellen, et al., Case No. 5:22-cv-01448-LCB (N.D. Ala.).

As we have previously discussed, the CTA is a far-reaching federal law that became effective on January 1. The CTA requires many companies (called “reporting companies”) to disclose information about the individuals who, directly or indirectly, exercise substantial control over them or own or control at least 25% of the ownership interests in them (called “beneficial owners”), as well as about certain so-called “company applicants,” to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the US Department of the Treasury that collects and analyzes information in order to combat money laundering, terrorism financing, and other financial crimes.

In this decision, the Northern District of Alabama granted the motion for summary judgment brought by the plaintiff National Small Business Association (NSBA) on behalf of its members. An NSBA member who owns two small businesses subject to the CTA is also a plaintiff in this lawsuit. The NSBA is a non-profit corporation that represents and protects the rights of small businesses across the country, including its approximately 65,000 members. The court’s ruling prohibits FinCEN, its employees, and other federal agencies from enforcing the CTA against the NSBA’s members. FinCEN confirmed in a March 4 notice that it will not enforce the CTA against the plaintiffs in this lawsuit (including members of the NSBA as of March 1) while the court’s order “remains in effect.”

Although the court generally found that the CTA exceeds the Constitution’s limits on Congressional power and is therefore unconstitutional, the court’s order does not appear to prohibit FinCEN from enforcing the CTA against entities that are not members of the NSBA. It is expected that the US Department of Justice will appeal this decision and will seek to pause the effect of this decision pending the result of any appeal. In the meantime, the CTA appears to remain in effect as to all reporting companies that are not NSBA members. Companies that are subject to the CTA (particularly if they were formed in 2024 and have a 90-day window after formation in which to file their initial reports) may find it prudent to continue to comply with the CTA’s reporting requirements until there is greater clarity on the status of the law.