Corporate Transparency Act Ruled Unconstitutional
A federal court has ruled the Corporate Transparency Act unconstitutional, creating immediate uncertainty around beneficial ownership reporting (BOI) requirements. The ruling impacts compliance obligations for many investor-backed private companies, which are the primary target of the legislation.
- The ruling originated from a lawsuit, *National Small Business United v. Yellen*, filed in the U.S. District Court for the Northern District of Alabama. The plaintiff, the National Small Business Association (NSBA), argued the law's reporting requirements were an unconstitutional overreach and an undue burden on small businesses. - Judge Liles C. Burke's March 1, 2024, decision found the Act unconstitutional because it exceeded the powers granted to Congress. The court rejected the government's arguments that the law was justified under its foreign affairs, commerce, and taxing powers, stating it lacked a sufficient nexus to those enumerated powers. - The original injunction was not nationwide; it only applied to the plaintiffs, which included the NSBA's members as of March 1, 2024. The Financial Crimes Enforcement Network (FinCEN) announced it would comply with the order for the plaintiffs but continue to enforce the law against all other reporting companies. - Enacted in 2021, the Corporate Transparency Act was designed to combat the use of anonymous shell companies for illicit activities like money laundering and terrorism financing. It required many corporations and LLCs to report information about their beneficial owners—individuals who exercise substantial control or own at least 25% of the company—to FinCEN. - Following the Alabama ruling, the government appealed to the U.S. Court of Appeals for the 11th Circuit. Meanwhile, separate legal challenges in other jurisdictions, including the 5th Circuit, led to a series of conflicting injunctions and stays, creating significant legal uncertainty for businesses. - In a major policy shift, the U.S. Treasury issued an interim final rule in March 2025 that effectively exempted all U.S. domestic companies from the reporting requirements. The new, narrower rule limited the mandate primarily to foreign-owned entities registered to do business in the United States. - The 11th Circuit ultimately reversed the lower court's decision in December 2025, upholding the Corporate Transparency Act as a constitutional exercise of Congress's power under the Commerce Clause. However, the practical impact of this reversal is limited due to the Treasury's 2025 rule change, which still exempts most domestic companies from filing.
