Federal Judge Rules Corporate Transparency Act Is Unconstitutional

On February 29, a federal judge ruled the Corporate Transparency Act (CTA) is unconstitutional. The Metals Service Center Institute (MSCI), the National Small Business Association, the S-Corp Association, and dozens of other business trade associations opposed this law because of the enormous time and financial costs it would impose on businesses.

As approved by Congress, the CTA would require about 32 million U.S. business, including small firms, to report and to continuously update information regarding their beneficial owners. If a company failed to report this information, they would face civil and criminal penalties of up to $10,000 and two years jail time. As the S-Corp Associations said, “[T]he bottom line is that the CTA would have saddled law-abiding citizens with compliance headaches and criminal penalties, while doing virtually nothing to combat illicit activity.”

The National Small Business Association led the legal challenge to the law, alleging that it violated a host of constitutional protections.

Last week, Presiding Federal District Court Judge Liles Burke agreed. “[T]his case presents a deceptively simple question: Does the constitution give Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a state?” Judge Burke explained. He determined the U.S. constitution does not afford Congress that power. “Because the CTA exceeds the constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals, the plaintiffs are entitled to judgment as a matter of law.”

The ruling means that, for now, businesses that are part of the National Small Business Association do not have to do anything to comply with the CTA. (Other businesses still must comply.) The U.S. Department of Justice is almost certain to appeal the ruling, however, so this matter is far from over. Stay tuned to Connecting the Dots for future developments in this case.