Corporate Transparency Act Ruled Unconstitutional: An Update
Alabama court sides with small-business group on whether Congress had power to enact CTA. Other concerns include privacy issues and high noncompliance penalties.
On January 1, 2024, the Corporate Transparency Act (CTA) became effective. Every new corporation, limited liability company (LLC), limited partnership and any entity whose existence is created by a filing with a Secretary of State in any state must file with the Financial Crimes Enforcement Network (FinCEN). More than 32 million entities are estimated to be affected and required to file.
This filing will require the business name, current address, state of information and tax identification number for the entity. The filing will also require the name, birth date, address and a copy of a government-issued photo ID, such as a driver’s license or passport, of every direct and indirect owner. Each of the 32 million or more entities will almost certainly involve a filing by more than one person.
The inclusion of this information for indirect owners creates both complexity and a very broad range of who qualifies as an indirect owner requiring filing of individual otherwise personal information. Penalties for failure to comply are high. (Read more about the CTA in my article Are You Ready for the Corporate Transparency Act?)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
On March 1, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional. The CTA is already deceptively complicated as it applies to both direct ownership and to “beneficial ownership.” The plaintiffs in the Alabama case are members of the National Small Business Association (NSBA). The ruling would appear directly applicable to the members of the NSBA to delay or excuse their filing requirements depending upon the government’s reply. This decision may appear to indirectly lessen the requirement for compliance in the short term to us all. Only time will tell if the federal government will appeal, or if the CTA is revised.
Here are some of the concerns about the CTA:
Private information is required to be filed. One of the issues about the CTA is the requirement to file or provide personal information, such as a copy of a driver’s license or passport, home address and Social Security number. This is always a concern because of the proliferation of identity theft. We are all worried about keeping our personal, private information safe, particularly of this type.
Short deadline. Changes to beneficiaries must be reported within a very short timeframe. For example, if a minor turns 18 and is an owner or inheritor of shares of a company, then this change must be reported within 30 days. The minor turning 18 may not even have knowledge of this inheritance within 30 days. That report is to include personal data such as Social Security number and driver’s license. Name changes from marriages and even moving to a new home would trigger similar updates.
Compliance requirements. Compliance with the CTA can impose a significant burden on small businesses. Small businesses are actually the target for the CTA, and large and public businesses are exempt. This is the opposite for securities filings that impose more complex rules for large and publicly traded companies with exemptions for small businesses.
Heavy penalties for failure to comply. Penalties are severe for failure to comply. The CTA divides penalties into three categories: unknowing violation, willful failures and violations in pursuit or as part of another federally illegal act. Penalties include a $500 daily civil penalty, fines of up to $10,000 and a possible two-year prison sentence for those that do not provide or update beneficial ownership information with FinCEN. Knowingly failing to comply may trigger a $500 per day civil penalty, $250,000 in fines and a five-year federal prison sentence.
These issues are in addition to the constitutional issues addressed by the court, such as whether there was the power to issue the CTA. Part of that argument is whether the federal Congress can regulate intrastate commerce or only interstate commerce.
That said, the ruling appears by its terms to affect only CTA compliance and filing requirements for members of the NSBA. The CTA has a much broader reach than that. Note that law firms and other professionals that form business entities may have an obligation to file under the CTA. The CTA itself requires study and examination to understand the compliance requirements. Moreover, the severe penalties for failure to comply warrant careful consideration.
With all of that in mind, consider using your best efforts to continue to comply with the CTA requirements unless, or until, more definitive guidance becomes available.
Related Content
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Founder of The Goralka Law Firm, John M. Goralka assists business owners, real estate owners and successful families to achieve their enlightened dreams by better protecting their assets, minimizing income and estate tax and resolving messes and transitions to preserve, protect and enhance their legacy. John is one of few California attorneys certified as a Specialist by the State Bar of California Board of Legal Specialization in both Taxation and Estate Planning, Trust and Probate. You can read more of John's articles on the Kiplinger Advisor Collective.
-
Trump Offers Millions of Workers Buyouts. If You're Near Retirement, Should You Jump at a Buyout Offer?
President Trump is offering government workers a buyout. If you are on the receiving end of this or a similar offer and are close to retirement, here’s what to consider.
By Donna Fuscaldo Published
-
Alibaba Stock Gains on Promises Its New AI Model Is Better Than DeepSeek
Alibaba stock is higher Wednesday after the Chinese conglomerate said its updated AI model outperforms DeepSeek and other competitors. Here's what to know.
By Joey Solitro Published
-
How to Slash Kiddie Taxes on Your Child's UTMA Account
Gifts to children can come with tax strings. To keep your child's gift growing and avoid tax bills for yourself along the way, consider this long-term strategy.
By David Jaeger, CFP® Published
-
Your Family Money Values Matter: How to Get on the Same Page
How you grow up shapes you financially. That can make things tricky for couples and their kids, so follow these four steps to help establish your family values.
By Julie Virta, CFP®, CFA, CTFA Published
-
What Are the Investment Opportunities and Threats in 2025?
It's the Year of the Wood Snake, representing growth, introspection, transformation and a need for patience. What could that mean for your finances?
By Michael Aloi, CFP® Published
-
How Much Fun Is Too Much Fun When You're in the Office?
Having a work-should-be-fun atmosphere sounds great — until someone gets hit in the head by a basketball. What should companies consider about workplace safety?
By H. Dennis Beaver, Esq. Published
-
You've Saved for Retirement: Now You Need a Safe Income Plan
You can't control the markets, but you can control how you withdraw your money. A comprehensive distribution plan can do wonders to help your savings last.
By Cliff Ambrose, FRC℠, CAS® Published
-
The Four Key Pillars of Wealth Management of the Future
The role of the family office is evolving with the Great Wealth Transfer and tech advancements. This is how financial professionals can manage the shifts.
By Daniel DiBiasio Published
-
Five Steps to Answer Your Million-Dollar Retirement Question
Are you saving enough to live comfortably in retirement? Here are the steps you can take now to find out if you're on track or need to adjust your savings.
By Romi Savova Published
-
How to Use DSTs and 1031 Exchanges for Diversification
This hypothetical case study shows how an investor used Delaware statutory trusts (DSTs) to build a diversified 1031 DST portfolio and avoid a $2M tax bill.
By Dwight Kay Published