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Editor's Note: As of December 2024, the CTA is at the center of growing legal challenges that question its constitutionality and potential impact on small businesses. In two high-profile lawsuits, federal courts are examining whether the CTA’s reporting requirements violate the Fourth Amendment and impose unreasonable burdens on law-abiding business owners. A federal judge in Alabama has already ruled the law unconstitutional, while a similar challenge in Michigan, led by the Small Business Association of Michigan (SBAM), seeks to block its enforcement nationwide. These developments have left small businesses navigating legal uncertainty and weighing the costs of compliance against the risks of penalties for non-compliance.
Here’s what you need to know about the ruling, its implications, and the reporting requirements should they resume in the future.
Two Lawsuits Allege the CTA is Unconstitutional
In Alabama, a federal judge ruled the CTA unconstitutional, stating it exceeds Congress's constitutional authority. The government has appealed this ruling.
A second lawsuit was filed in Michigan by the Small Business Association of Michigan (SBAM) and others seeking to block enforcement of the CTA.
How to Comply With The Corporate Transparency Act
They argue the reporting requirements treat law-abiding business owners like "criminals" by collecting personal data without any suspicion of wrongdoing, violating the Fourth Amendment.
Compliance costs could reach $21.7 billion
A key argument from plaintiffs is that the CTA imposes significant compliance costs, disproportionately impacting small businesses. FinCEN estimates the 2024 compliance costs could reach $21.7 billion, largely borne by smaller companies.
The CTA requires reporting companies (corporations, LLCs, etc.) to disclose beneficial ownership information like names, birthdates, and copies of IDs/passports. Plaintiffs argue this goes far beyond what states require for business filings.
"It's entirely possible millions will unintentionally violate this vague law and face severe consequences endangering their livelihood," said SBAM President Brian Calley.
Overreach or necessary for transparency?
Proponents argue the CTA eliminates critical vulnerabilities that enable money laundering and illicit finance through opaque company structures.
But critics claim it's an unconstitutional overreach treating innocent business owners as suspects. With potential criminal penalties for non-compliance, the lawsuits aim to get the CTA struck down or revised.
As the legal battles continue, small businesses must weigh the costs of CTA compliance against risking violations of a law critics argue overreaches and imposes excessive burdens.
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