CTA Declared Unconstitutional in Alabama – but Washingtonians Still Must Comply

On Friday, March 1, 2024, a federal district court declared the Corporate Transparency Act (“CTA”) unconstitutional, in an action brought by an individual and the National Federation of Small Business.  The court concluded that the CTA, in its current incarnation, exceeded Congress’s authority and could not be constitutionally justified under either the power to regulate foreign affairs or interstate commerce.  The statute intruded into an area of law traditionally left to the states, regulation of the formation of corporations and other business entities.  It did so by requiring, under penalty of criminal prosecution, reporting personal information about owners merely for forming a “covered” entity.

Takeaways:

1. Washington covered entities and their owners must still comply with CTA. The court’s decision applies only to the plaintiffs; it is not a general declaration of unconstitutionality.
2. However, the challenge was a “facial” challenge, which means that it is unconstitutional in all applications. If upheld on appeal, the court’s decision would invalidate CTA, as written, entirely.
3. The decision will almost certainly be appealed. Whether the court will stay its decision pending appeal is not yet known.
4. The decision is a narrow one, with the court noting ways in which the CTA could have been written to pass constitutional muster. As written, the CTA applies to all covered entities, regardless of whether they engage in interstate commerce, or even commerce at all.

For more information on the Corporate Transparency Act and its effect on Washington residents and businesses, please contact: