What Does Latest Ruling on the Corporate Transparency Act (CTA) Mean for Your Business?

March 11, 2024

In a ruling handed down last week out of the United States District Court for the Northern District of Alabama, the Corporate Transparency Act (CTA) was ruled unconstitutional.

In the matter National Small Business United, d/b/a the National Small Business Association, et al. v. Yellen, et al., the court ruled that the CTA is unconstitutional because the legislation “cannot be justified as an exercise of Congress' enumerated powers.”

While the government is expected to appeal the ruling and seek a stay, the ruling is considered ambiguous by some legal experts and leaves an estimated 32 million businesses in the United States in limbo.

The CTA took effect on January 1, 2024, the depth of which was covered in a previous client alert penned by Gross Shuman Corporate Attorney David Alexander. Since then, the Act, which has been criticized as being too onerous and far-reaching, particularly for small business owners, has been under fire from business advocacy groups as well as those who believe the Act infringes on individual privacy rights.

While it will take some time for the courts to sort out the fate of the CTA, New York recently enacted its own, similar legislation. In December, Gov. Kathy Hochul signed the LLC Transparency Act, a law that largely mirrors the CTA.

The Act creates a database of the beneficial owners of Limited Liability Corporations that is accessible to government agencies and law enforcement. In a release touting the new legislation, the governor’s office highlighted the balance New York’s law strikes between allowing members of law enforcement and regulatory authorities to uncover misconduct, while not overstepping citizens’ rights to privacy.

New York’s LLC Transparency Act takes effect on December 21, 2024, giving both time for business owners to prepare, as well as for potential opposition groups to challenge the constitutionality of the law.

This is a fluid situation as we wait to see how the Federal Government responds to the ruling out of Alabama. In the meantime, the safest course of action for business owners may be to just proceed with filing as required under the CTA. Given the murkiness of exactly who may be exempt following the Alabama ruling (some say it only covers the plaintiffs in that particular case) this may be a matter of “better safe than sorry.”

At Gross Shuman, our Corporate Law Practice members are keeping a watchful eye on the case out of Alabama, as well as the countdown to implementation of the New York law. If you have questions or concerns, our attorneys are here to help. You can reach any member of our Corporate Team here, or by calling 716-854-4300.