On March 1, the U.S. District Court for the Northern District of Alabama found the Corporate Transparency Act (CTA) unconstitutional in a case filed by the National Small Business Association (NSBA).
We recently reported how the CTA could impact franchising in New York and nationwide. The news coming from the Yellowhammer State is the perfect catalyst for wrapping up Q1 by revisiting what this development could mean for you and your franchise.
Corporate Transparency Act – The Basics
The CTA was enacted by Congress in 2021 and took effect on Jan. 1, 2024. The CTA requires many companies formed or operating in the United States to report their beneficial ownership information (BOI) to the Treasury’s Financial Crimes Enforcement Network (FinCEN), which would store this sensitive information in a secure, confidential database.
The law’s purpose stems from the U.S. Department of the Treasury’s efforts to crack down on shell companies. The Department aimed to prevent corrupt and other actors from laundering illicit funds through anonymous companies in the U.S. It would also equip law enforcement and other partners with the information they need to disrupt financial anonymity that enables crimes such as corruption, drug trafficking, and terrorism.
Despite its noble intentions, the CTA was not well-received by all stakeholders. For example, the NSBA, which is the nation’s oldest advocacy group representing small business owners and which includes many franchise stakeholders, had publicly stated that the CTA was a “poor policy that unfairly targets America’s small businesses.” It further commented that “millions of small-business owners still do not know about the requirements of the CTA” and “that the database is ripe for data security issues and confusion, which could saddle small-business owners with hefty penalties or even jail time.”
The NSBA filed suit against Treasury Department Secretary Janet Yellin, arguing that the CTA overstepped “the bounds of privacy, the law, and common sense at the expense of America’s small businesses.”
CTA Update in March 2024
On March 1, 2024, a federal district court in the Northern District of Alabama, Northeastern Division, entered a declaratory judgment in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.). The Judge was asked to determine whether the Constitution gives Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status form a state. The court concluded that the CTA exceeds the Constitution’s limits on Congressional power and enjoined the Department of the Treasury and FinCEN from enforcing the CTA against the plaintiffs. Although the injunction was issued, the matter is not completely resolved and the government will likely appeal the decision.
What This Means For NY Franchises
NY franchise businesses and other companies should assume they are still required to comply with the CTA, as the court’s decision only applies to the plaintiffs in that case (which presumably includes NSBA members). However, stay tuned for updates. Should the government appeal the decision and the issue reach the Supreme Court or if other cases are brought challenging the law, some finality could be reached for franchises and other businesses.
Read the federal court’s ruling and the NSBA’s reaction.
Lusthaus Law will continue to observe how state and federal laws impact clients and the franchising industry. Visit our recent Insights installment featuring updates on non-compete agreements and New York’s new minimum wage law.
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