National Injunction Halts Intrusive Small Business Reporting Law

The Corporate Transparency Act (CTA), nestled within the 2021 National Defense Authorization Act, mandates that small businesses with 20 or fewer employees disclose their ownership details to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. This seemingly innocuous provision, however, carries a “significant regulatory punch,” as described by Judge Liles C. Burke of the U.S. District Court for the Northeastern District of Alabama, potentially subjecting non-compliant business owners to daily fines, imprisonment, and hefty financial penalties. The CTA has triggered legal challenges arguing that it overreaches federal authority and infringes upon constitutional rights.

Several lawsuits have been filed challenging the CTA’s constitutionality. One lawsuit, brought by the National Small Business Association (NSBA), resulted in Judge Burke issuing a ruling that prohibited enforcement of the law against the NSBA and its members. He argued that the law lacked constitutional justification for imposing ownership reporting requirements on businesses incorporated under state laws, a matter traditionally left to individual states. This initial victory offered a glimpse of hope for small businesses burdened by the impending regulations.

A separate lawsuit, spearheaded by the Center for Individual Rights on behalf of several small businesses and the Libertarian Party of Mississippi, further intensified the legal battle against the CTA. Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas delivered a scathing rebuke of the law, characterizing it as a “quasi-Orwellian statute” that undermines the principle of federalism and threatens the anonymity traditionally associated with corporate formation. Judge Mazzant also highlighted the substantial financial burden of compliance, estimated by FinCEN to be in the billions of dollars.

Judge Mazzant’s ruling resonated with the arguments presented by the plaintiffs, who demonstrated the potential harm they faced from compliance costs and the infringement on their constitutional rights. He acknowledged the government’s admission of the significant financial burden imposed by the CTA, further strengthening the plaintiffs’ case. The judge also recognized the potential violation of First and Fourth Amendment rights through compelled disclosure of information. Consequently, he granted a preliminary injunction against the CTA, offering temporary relief to small businesses nationwide.

The government, however, contended that due to the large membership of the National Federation of Independent Businesses (NFIB), also a plaintiff in the case, the injunction effectively became a national injunction. Ironically, this argument, intended to limit the scope of the injunction, inadvertently resulted in a broader application of the ruling, benefiting all small businesses subject to the CTA. This unexpected outcome underscored the far-reaching implications of the legal challenge and the potential for a nationwide reprieve from the burdensome regulations.

While the preliminary injunction provides a temporary respite, the legal battle is far from over. The federal government has indicated its intention to appeal the decision, leaving the ultimate fate of the CTA uncertain. Small business owners are advised to consult with legal counsel to determine their status under the law and prepare for the possibility of the injunction being lifted. Although the legal challenges have yielded a significant victory for small businesses and proponents of limited government, the fight to protect individual rights and uphold the principles of federalism continues. This ongoing struggle highlights the importance of vigilance in safeguarding against government overreach and preserving the delicate balance of power within a federalist system.