Many business owners in Michigan, and across the country, have been gearing up to comply with the new Corporate Transparency Act (the “CTA”), a federal law which took effect at the start of this year that requires companies to disclose information about their beneficial owners, senior officers and other control persons to the federal government. If you’re one of those business owners, and you saw recent headlines that a federal district court held the CTA unconstitutional, you’re probably wondering if you still have to comply.
The short answer is: you probably do, because the relief granted by the court is limited to the plaintiffs in the case. But let’s dig in and discuss what happened in this case, because it has implications for what’s likely to happen with the CTA in the months ahead.
The Court’s Ruling
On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional. However, the ruling is limited to enjoining the federal government from enforcing the CTA against the plaintiffs in the case, including the National Small Business Association (“NSBA”) and Isaac Winkles, an NSBA member.
The lawsuit was filed in November 2022. It argues that the CTA’s required disclosures exceed Congress’s authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments.
The court held that the CTA does, indeed, exceed the limits of Congress’s power. It did not rule on the plaintiffs’ other allegations concerning the First, Fourth, Fifth, Ninth, and Tenth Amendments.
In particular, the court ruled that the CTA is unauthorized because it deals with incorporation, an internal matter reserved for states, thus falling outside Congress’s foreign affairs powers. Furthermore, the CTA does not regulate commerce directly and is not considered essential to commerce regulation, making it invalid under the Commerce Clause. Lastly, the court found the CTA unsupported by Congress’s taxing powers, as its benefits to tax collection alone do not justify invoking these powers.
Next Steps
The court’s decision, while significant, has limited effect. The federal government, which is likely to appeal the decisions, is enjoined from enforcing the CTA against the plaintiffs only. However, this lawsuit and its outcome may lead to similar litigation, and additional courts may—or, of course, may not—reach a similar conclusion.
So what should you do as a business owner? For now, given this ruling’s limited scope and the uncertainty of whether other courts will follow suit, the best course of action may be to move forward under the assumption that the CTA will remain in effect. However, stay tuned and continue to monitor developments (we will keep you apprised of the situation) given the likelihood of additional litigation challenging the CTA’s constitutionality.
If you have any questions about compliance with the CTA or need legal assistance, please contact Zana Tomich.
