Is the Corporate Transparency Act Constitutionally Sound? A Timely Update

Is the Corporate Transparency Act Constitutionally Sound? A Timely Update

By John M. Goralka

On January 1, 2024, the Corporate Transparency Act (CTA) became effective. Every new corporation, limited liability company (LLC), limited partnership and any entity whose existence is created by a filing with a Secretary of State in any state must file with the Financial Crimes Enforcement Network (FinCEN). More than thirty-two (32) million entities are estimated to be affected and required to file.

This filing will require the business name, current address, state of information and tax identification number for the entity. The filing will also require the name, birth date, address and a copy of a government-issued photo ID such as a driver’s license or passport of every direct and indirect owner. Each of the thirty-two (32) million or more entities will almost certainly involve a filing by more than one person. The inclusion of this information for indirect owners creates both complexity and a very broad range of who qualifies as an indirect owner requiring filing of individual otherwise personal information. Penalties for failure to comply are high - $500 a day up to $10,000 and up to two (2) years in jail (per occurrence). If the failure to comply is determined to be intentional, then the maximum penalty is $250,000 with a possible five-year prison sentence.

On March 1, 2024 the US District Court for the Northern District of Alabama ruled that the CTA is unconstitutional. The CTA is already deceptively complicated as it applies to both direct ownership and to “beneficial ownership”. The plaintiffs in the Alabama case were the members of the National Small Business Association (“NSBA”). The ruling would appear directly applicable to the members of the NSBA to delay or excuse their filing requirements depending upon the government’s reply. This decision may appear to indirectly lessen the requirement for compliance in the short term to us all. Only time will tell if the federal government will appeal or if the CTA is revised. 

Some of the concerns are as follows:

1. Private Information Is Required to Be Filed.

One of the issues about the CTA is the requirement to file or provide personal information such as a copy of a driver’s license or passport, home address and serial number. This is always a concern in today’s world filled with identity theft crimes. We are all worried about safe-keeping our personal, private information particularly of this type.

2. Short Deadline.

Changes to beneficiaries must be reported with a very short deadline. For example, if a minor turns eighteen (18) and is an owner or inheritor of shares of a company, then this change must be reported within thirty (30) days. The minor turning eighteen (18) may not even have knowledge of this inheritance within thirty (30) days. That report is to include personal data such as the social security number and a copy of the driver’s license. Name changes from marriages and even moving to a new home would trigger similar updates. 

3. Compliance Requirements.

Compliance with the CTA can impose a significant burden on small businesses. Small businesses are actually the target for the CTA and large and public businesses are exempt. This is the opposite for securities filings which impose more complex rules for large and publicly traded companies with exemptions for small businesses. 

4. Heavy Penalties for Failure to Comply.

Fines of $500 a day up to $10,000 and up to two (2) years in jail (per occurrence) can be levied for failure to comply. For intentional failure to comply, the maximum civil or financial penalty is $500,000 with a possible five year-year prison sentence (per occurrence). These are stiff penalties for unsophisticated small businesses that may fail to fully understand and comply with reporting requirements. 

These issues are in addition to the constitutional issues addressed by the court such as whether there was actually the power to issue the CTA. Part of that argument is whether the federal congress can regulate intrastate commerce or only inter-state commerce.

That said, the ruling appears by its terms to only affect CTA compliance and filing requirements for the NSBA and its members. The CTA has a much broader reach than that. Note that law firms and other professionals that form business entities may have an obligation to file under the CTA. The CTA itself requires study and examination to understand the compliance requirements. Moreover, the severe penalties for failure to comply warrant careful consideration. 

With all of that in mind, consider using your best efforts to continue to comply with the CTA requirements unless or until further, more definitive guidance becomes available. Click here to see our article on the Corporate Transparency Act.