Is the Corporate Transparency Act Unconstitutional? Analyzing the Alabama Ruling
The Corporate Transparency Act, which took effect on January 1, 2024, requires certain companies to disclose information on their beneficial owners to the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN). This legislation, which is part of the National Defense Authorization Act, aims to prevent the use of legal entities for illicit activities such as money laundering and terrorist financing.
Despite the CTA's positive intentions, a federal district court in Alabama found the act unconstitutional in March 2024, arguing that Congress exceeded its enumerated powers when enacting it. The ruling and the subsequent developments have led to widespread uncertainty among businesses regarding their reporting obligations. However, the dispute has not significantly affected the act's enforcement, and legal proceedings to contest the court's decision are ongoing.
In this article, we'll discuss why the Alabama court ruled the Corporate Transparency Act unconstitutional and what effect the ongoing litigation might have on reporting companies. We will also explain how Harbor Compliance helps businesses file timely BOI reports and avoid penalties amid this legal dispute.
The Corporate Transparency Act—Alabama Case
Shortly after the CTA's enactment in 2021, the National Small Business Association (NSBA), a non-partisan advocacy group, filed a lawsuit before an Alabama district court, arguing that the law:
- Imposes undue burdens on small businesses
- Oversteps Congress' authority as outlined in Article 1 of the Constitution
- Violates the First, Fourth, Fifth, Ninth, and Tenth Amendments
On March 1, 2024, the Alabama district court ruled in favor of the NSBA and declared the CTA unconstitutional. The court argued that Congress exceeded its constitutional powers when enacting the act.
Shortly after the ruling, the Financial Crimes Enforcement Network (FinCEN) announced they had appealed the decision before the Eleventh Circuit, a federal appellate court. FinCEN also stated they would respect the court's ruling and not enforce the CTA upon the plaintiffs while the appeal is ongoing.
Regardless of the Eleventh Circuit's decision, the NSBA and FinCEN are expected to seek further review from the Supreme Court. This means it might take over a year to reach the final verdict on the matter.
Immediate Implications of the Corporate Transparency Act Lawsuit
The Alabama district court's ruling led to widespread speculation regarding the CTA's enforcement, with some entities believing they no longer needed to report their BOI to FinCEN. However, the ruling's actual impact is more limited than it appears.
According to FinCEN's statement, the enforcement suspension only applies to the NSBA and its 65,000 members who joined the association before March 1, 2024. All other reporting entities, including those not affiliated with the NSBA before the court ruling and not part of the 23 exempt categories listed in the CTA, must report on their beneficial ownership regularly.
According to the FinCEN, all reporting companies must adhere to one of the following timelines for filing their BOI reports:
- Companies formed before January 1, 2024, are required to file their BOI before January 1, 2025.
- Entities formed or registered in 2024 have 90 calendar days from receiving public notice that their creation or registration was effective to file their BOI report.
- Companies formed or registered after January 1, 2025, must file their BOI within 30 calendar days of receiving public notice that their registration is effective.
Any updates or corrections to the information previously disclosed to FinCEN have to be submitted within 30 calendar days to avoid civil and criminal penalties.
Why Is It Unlikely for the Corporate Transparency Act To Be Struck Down Permanently?
Beyond the initial debate about whether companies need to disclose their BOI, the Alabama court ruling has also sparked speculations about the future of the CTA. Some argue that the CTA could be overturned in the future, which might eliminate the newly established reporting requirements for entities altogether.
However, it is unlikely that the CTA would be permanently overturned for the following reasons:
1. National Security
The CTA's primary goal is to combat the use of shell companies to facilitate money laundering and other illegal financial activities. Permanently overturning the CTA would significantly limit the Department of Justice's ability to uncover these entities, thus weakening efforts to protect American national security.
2. Global Standards
Many countries are already adopting corporate transparency laws to combat financial crimes, and the U.S. must align with these standards to avoid becoming a haven for illicit activities. The Financial Action Task Force (FATF) recommendations are an example of such standards.
The FATF is an intergovernmental organization that establishes standards to address money laundering, terrorist financing, and other threats to the global financial system. Out of its 40 recommendations, two focus on transparency and BOI. Three critical aspects highlighted in these recommendations include:
- The need for countries to take measures to prevent the misuse of entities for money laundering and terrorist financing
- The importance of having accurate and up-to-date BOI that is easily accessible to competent authorities
- The need to establish mechanisms to collect BOI from entities
The U.S. is one of the 40 member countries of the FATF and is unlikely to disregard its recommendations regarding corporate transparency and BOI reporting.
3. State Level Initiatives
Several states in the U.S. have already enacted their own transparency laws. For example, the New York LLC Transparency Act (NY LLCTA) will require LLCs organized and qualified in New York to disclose their BOI to the New York Department of State.
It is unlikely that state legislators and attorneys general would be advancing such initiatives if they believed the CTA would be overturned.
Adhering to the Corporate Transparency Act With Harbor Compliance's BOI Reporting Service
Despite the Alabama court ruling, all reporting companies—except for the NSBA and its 65,000 members—must report their BOI to the FinCEN. This means that approximately 30 million companies are still expected to disclose information on their beneficial owners.
Given that the CTA is still a relatively new piece of legislation, organizations must pay close attention to its terms to avoid penalties. Therefore, outsourcing BOI reporting to a third-party service provider can be an effective way to navigate the complexities of this new law.
Harbor Compliance is a professional service provider dedicated to helping organizations meet their regulatory requirements and maintain good standing with the state. Our cutting-edge software solutions streamline and simplify compliance workloads, allowing you to focus on growing your business without worrying about state regulations and associated penalties.
Specifically, our BOI Reporting Service assists reporting companies in filing their BOI reports with FinCEN, allowing them to concentrate on core aspects of their business while experts handle their BOI reporting obligations.
As part of the service, we'll securely gather the necessary information and file up to four initial, corrected, and updated BOI reports in a single year on your behalf.
Advantages of Using Harbor Compliance's BOI Reporting Service
The key benefits of entrusting your BOI reporting tasks to Harbor Compliance are:
- Freeing up hours that would otherwise be spent preparing and filing BOI reports, allowing you to dedicate more time to core business activities
- Avoiding costly fines, legal expenses, and criminal penalties associated with failing to file a BOI report on time
- Receiving regular automated messages to remind you to update or correct information in your BOI report
Additionally, you can request access to the Records Manager, which is offered separately as part of our compliance software suite. The Records Manager assists entities by:
- Providing a comprehensive system for tracking ownership and leadership details.
- Managing corporate records.
- Sending automated reminders for upcoming renewals, which helps you keep your documentation current and accurate.
The Process of Ordering Harbor Compliance's BOI Reporting Service
Our BOI Reporting Service caters to two categories of clients:
- A single entity like a corporation, LLC, or a nonprofit that is not 501(c) exempt
- Multiple entities
To order Harbor Compliance's BOI Reporting Service, take the following steps:
- Go to Harbor Compliance's sign-up wizard.
- Select your entity type.
- Provide details like your company name and contact information.
- Confirm your details and submit the online form.
Additional Services Harbor Compliance Offers
Harbor Compliance's services extend far beyond BOI reporting. We support entities in managing their entire lifecycle, securing business licenses, and setting up tax accounts. The table below outlines our most popular solutions:
| Category | Services |
|---|---|
| Registered agent services | We have physical offices across the U.S., which enables us to serve as your organization's registered agent in all states and territories. |
| Business licensing support | We assist companies in filing for and obtaining the business licenses they need to operate in the U.S. |
| Nonprofit formation | We help nonprofit organizations file for the 501(c) tax exemption and incorporation. |
| Entity lifecycle formation | We assist entities during their lifecycle by filing initial and annual reports on their behalf. We also assist in managing Doing Business As (DBA) requirements and filing for incorporation, reinstatement, LLC formation, name reservation, and amendment. |
| Document filing and retrieval | We assist entities in obtaining their foreign qualification, certified copies, and certificates of good standing. |
| Tax registration | We help entities secure their Employer Identification Number (EIN) and establish payroll tax accounts. |
Is the Corporate Transparency Act Unconstitutional? FAQs
This section will address some frequently asked questions about the Alabama court ruling that declared the CTA unconstitutional. For more answers and resources, visit Harbor Compliance's Information Center.
The only entities currently affected by the Alabama district court ruling on the CTA are the NSBA and its members who were part of the association before March 1, 2024.
No. Following the court ruling, the FinCEN issued a statement confirming that, despite the court's decisions, all reporting entities—excluding the NSBA and its members—must continue to file their BOI reports while legal proceedings concerning the CTA are ongoing.
Regardless of the Eleventh Circuit's decision, both FinCEN and NSBA are likely to appeal to the Supreme Court for a final judgment on the enforcement of the CTA.
Leveraging Harbor Compliance's BOI Reporting Services
The Alabama court ruling that deemed the Corporate Transparency Act unconstitutional has a limited scope—it only affects the National Small Business Association (NSBA) and its members who were part of the association before the ruling.
The CTA is also unlikely to be permanently overturned due to its importance for U.S. national security and its need to meet global corporate transparency standards.
Given that the CTA is likely here to stay, if you qualify as a reporting company, you need to adhere to its BOI reporting provisions to avoid fines and legal consequences. Outsourcing your BOI reporting needs by ordering our BOI Reporting Service is an effective way to meet this regulatory requirement while saving precious time.
If you wish to partner with us, get started by evaluating your regulatory standing with our free Compliance Score™ and requesting a demo session of our award-winning software.
