Alabama Court Ruling On The CTA: Implications On Nationwide BOI Reporting Companies

March 1, 2024, marked a pivotal moment in the legal landscape as a federal judge in Alabama’s Northern District Federal Court issued a significant ruling regarding the Corporate Transparency Act (“CTA“) declaring it unconstitutional. This act, along with its associated regulations, mandates that numerous privately held corporations, limited liability companies, and similar entities (referred to as “reporting companies”) established or registered for business operations within the United States must disclose “beneficial ownership information” (“BOI“) to the Financial Crimes Enforcement Network (“FinCEN“) of the U.S.

The BOI rule’s definition of a reporting company generally applies to the majority of U.S. businesses and numerous non-U.S. entities established or registered within the United States. Beneficial owners are individuals who, either directly or indirectly, hold significant authority over a reporting company or possess at least 25 percent of its ownership stakes. These reporting companies must adhere to the BOI requirements by the end of the year if they were formed or registered before January 1, 2024. Companies established after this date have 90 days to comply, with a reduced time frame of 30 days for those formed or registered after January 1, 2025.

The district court’s ruling declared the CTA unconstitutional, stating that it goes beyond the boundaries set by the Constitution for the legislative branch. The court found that the CTA needs a clearer connection to any enumerated power, making it an improper method for achieving Congress’ policy objectives. Specifically, the court concluded that the CTA does not fall under Congress’s authority outlined in the commerce, taxing, necessary, and proper clauses, as well as its foreign affairs and national security powers.

FinCEN Reacts to Court Decision; DOJ Appeals

In response to the recent court ruling, FinCEN stated on March 4, 2024. It stipulated that during any ongoing appeals process, it is restrained from enforcing the Corporate Transparency Act (CTA) against the plaintiffs, including members of the National Small Business Association and other individuals within the court’s jurisdiction. However, FinCEN emphasized that all remaining reporting companies must continue adhering to CTA requirements by submitting beneficial ownership reports by the law and FinCEN’s regulations. This stance is consistent with the government’s position that injunctions issued by courts typically only affect parties directly involved in the case and do not extend nationwide. Additionally, on March 11, 2024, the U.S. Department of Justice filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit.

Recommendations During CTA Appeal & State Legislative Uncertainty

During the ongoing appeal process and considering the federal district court’s limited nationwide injunction, it’s recommended that reporting companies unaffected by the court’s order continue to comply with the Beneficial Ownership Information (BOI) requirements outlined in FinCEN’s regulations, despite the ongoing appeal process and the limited nationwide injunction imposed by the federal district court’s ruling.

The uncertainty surrounding the Corporate Transparency Act may prompt states to enact their versions. Hence, businesses and their beneficial owners must monitor their respective state legislatures for developments regarding state-level CTA equivalents.

Silver Law, PLC is closely tracking the ongoing litigation and potential developments affecting the enforceability of the Corporate Transparency Act (CTA). Don’t go through these complexities alone. Contact us today to collaborate with dedicated professionals committed to safeguarding your business interests and offering customized legal strategies aligned with the evolving CTA landscape!