Michigan Federal Court Rules CTA Unconstitutional and U.S. Treasury Suspends Enforcement for Domestic Entities

Two major developments have significantly altered the ever-evolving landscape of Corporate Transparency Act compliance: a federal court in Michigan has declared the law unconstitutional, and the U.S. Treasury Department has announced it will not enforce the law against domestic entities. The Treasury Department’s announcement, in particular, means that domestic entities (as opposed to “foreign reporting companies”) will not be required to report beneficial ownership information by the previously imposed March 21, 2025 deadline.

Michigan Federal Court Rules CTA Unconstitutional on Fourth Amendment Grounds

On March 3, 2025, the U.S. District Court for the Western District of Michigan issued a ruling in Small Business Association of Michigan v. Yellen, finding that the CTA violates the Fourth Amendment to the U.S. Constitution’s protection against unreasonable searches. This decision represents the first time a federal court has invalidated the CTA on Fourth Amendment grounds.

Judge Robert Jonker ruled that the CTA’s reporting requirements amount to an unreasonable search of private business information. The court determined that business owners have a legitimate expectation of privacy in their beneficial ownership information (BOI), which has historically remained private and is not required to be disclosed to states like Michigan as a condition of forming an entity.

The court was particularly troubled by several aspects of the CTA:

1. The law creates what the court called an “Orwellian ‘Big Brother'” database of personal information explicitly designed for future law enforcement use
2. The CTA imposes a massive compliance cost on the smallest businesses in the economy (estimated at $21.7 billion nationally in the first year)
3. The reporting requirements are broad, unlike more targeted financial reporting laws
4. The government failed to demonstrate that alternatives, such as existing law enforcement tools, could not accomplish the same goals

Judge Jonker wrote: “The CTA may have good intentions but the road it chooses to pursue them paves over all reasonable limits… The Fourth Amendment prohibits such an unreasonable search.”

While this ruling directly applies only to the plaintiffs in the case (including the Small Business Association of Michigan, the Chaldean American Chamber of Commerce, and several Michigan LLCs and their owners), it represents a significant legal precedent that may influence other courts considering similar challenges.

Treasury Department Suspends Enforcement for Domestic Entities

In a parallel development, on March 2, 2025, the Treasury Department announced it would suspend the March 21, 2025 filing deadline for all domestic companies and U.S. citizens. Treasury officials indicated they are preparing a proposed rulemaking that would narrow the scope of the CTA to apply only to “foreign reporting companies” – entities formed under foreign law that have registered to do business in the U.S. This policy shift comes after months of legal battles across multiple federal courts, with conflicting rulings creating significant uncertainty for businesses. 

It’s worth noting that this administrative approach may face its own legal challenges, given that the text of the CTA itself explicitly covers both domestic and foreign entities. Meanwhile, Congress is reportedly contemplating changes to the law itself, which could render the widespread legal challenges to the CTA moot—or require new litigation.

What This Means for Michigan Businesses

For Michigan businesses, these developments provide relief from the immediate pressure to comply with the CTA’s reporting requirements. However, the situation remains fluid, and businesses should consider the following guidance:

1. Monitor Developments Closely: While domestic entities appear to be off the hook for now, the legal landscape continues to evolve. Treasury Department’s proposed rule narrowing the CTA’s scope has not yet been finalized, and additional court rulings could further impact enforcement.
2. Understand Your Status: The Treasury Department still intends to enforce the CTA against foreign reporting companies. The definition of “foreign reporting company” includes entities formed under foreign law that are registered to do business in the U.S.
3. Maintain Records: Though compliance may not be required at this time, businesses should maintain accurate records of their ownership structure. Should the legal situation change, having this information readily available will facilitate compliance if it becomes necessary.
4. Consult Legal Counsel: Given the complexity and continuing evolution of this issue, businesses should consult with legal counsel for guidance specific to their situation. This is particularly important for entities with complex ownership structures or foreign connections.

We will continue to monitor these developments and provide updates as the situation evolves. If you have specific questions about how these changes affect your business, please contact Zana Tomich.