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The Corporate Transparency Act Faces Legal Challenges

The Corporate Transparency Act (CTA), which would require many businesses to disclose the identities of owners and controlling persons, has faced a number of legal challenges since becoming effective in January 2024. At least one court, the U.S. District Court for the Northern District of Alabama, held that the CTA is unconstitutional. In its March 2024 ruling, the Court held that the CTA “exceeds the Constitution’s limits on the legislative branch” and therefore is neither necessary nor proper to achieve Congress’ intended policy goals, and that the government’s proposed interpretation of the necessary and proper clause would “give Congress carte blanche to do as it pleases.” However, the Court determined that the decision rendered the CTA unenforceable only against the plaintiffs (the National Small Business Association and its members), and the government has already appealed this ruling to the Eleventh Circuit Court of Appeals.

Most recently, on March 27, 2024, the Small Business Association of Michigan, the Chaldean American Chamber of Commerce, and other plaintiffs filed a complaint in the U.S. District Court for the Western District of Michigan challenging the constitutionality of the CTA. The complaint argues that the CTA exceeds the limits of Congress’ legislative authority, violates the Fourth Amendment’s protection against unreasonable search and seizure and the Fifth Amendment’s due process clause, and that the terms of the CTA are unconstitutionally vague. The complaint filed in Michigan in particular emphasizes the assertion of the rights arising under the Fourth and Fifth Amendments, which were claims not addressed in the Alabama case described above. The plaintiffs in the case are seeking expedited consideration of their motion for a preliminary injunction to enjoin the federal government from enforcing the requirements of the CTA against the Plaintiffs and their members. A similar case against the CTA is pending in Maine.

It is likely that similar challenges to the CTA will continue to emerge. However, it is possible that the decisions these cases may continue to be limited in scope and only apply to plaintiffs filing the complaint.  Unless a generally applicable ruling is issued providing that the CTA is not enforceable against U.S. businesses, continued compliance with the requirements of the CTA is likely the most conservative and appropriate course of action.

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