Recent Developments & Challenges to the Corporate Transparency Act

June 7, 2024

As we continue to monitor the future of the Federal Corporate Transparency Act (the CTA), which requires certain businesses to file a report disclosing their beneficial owners to the U.S. government, new developments in both federal courts and state legislatures continue to demonstrate how critical it is for business owners to familiarize themselves with the current CTA landscape and to understand how to meet any CTA compliance obligations and by what deadline.

A New Challenger in Federal Court: Texas

On May 28, 2024, a fourth lawsuit was filed in the United States District Court for the Eastern District of Texas challenging the CTA. The lawsuit, brought by the National Federation of Independent Businesses, Mustardseed Livestock, Russell Straayer, the Libertarian Party of Mississippi, and two small businesses in Texas, alleges that the CTA violates constitutional rights, including the right to privacy and the right against unreasonable searches and seizures.

The Texas lawsuit joins lawsuits in Alabama, Maine, and Michigan that were filed in federal district courts after the CTA become effective this year. In Alabama, the U.S. District Court for the Northern District of Alabama ruled the CTA unconstitutional as applied to the plaintiffs in that case, but the ruling was quickly appealed.

At the heart of the controversy surrounding the CTA is the balance between transparency and privacy. Proponents of the CTA argue that it is a crucial tool in combating illicit financial activities by shining a light on the true owners of businesses, thus making it harder for criminals to hide behind shell companies. On the other hand, opponents of the CTA, including the business owners and organizations behind all four lawsuits, argue that it places an undue burden on businesses and infringes upon their privacy and safety. Some critics even argue that the CTA disproportionately impacts small businesses and could stifle entrepreneurship.

California Senate Bill 1201: Surpassing the Federal CTA

A few days before the Texas lawsuit, on May 23, 2024, the California Senate passed a bill, SB-1201, sparking additional interest and debate about enhancing corporate transparency at the individual state level as the federal level sees challenges. Specifically, SB-1201 would also require U.S. and foreign entities doing business in California to disclose information about their beneficial owners to the California Secretary of State. SB-1201 aims to target employers and landlords that use anonymous companies to evade worker protection and habitability laws in California.

California joins other states considering their own individual framework, including New York, which has its own transparency requirements related to limited liability companies that go into effect at the end of this year.

SB-1201 would, however, actually surpass the federal CTA requirements by mandating all beneficial ownership information be published in a publicly available database. Possible filing fees, reporting on a biennial basis, and excluding any concept of exemptions from the filing requirements are also mentioned within the proposal. Such requirements all go beyond the federal CTA.

SB-1201 needs approval from the California Assembly before August 31, 2024, to be signed into law. If signed into law, it would go into effect in 2026. While it is unclear whether SB-1201 will ultimately be enacted, it is clear that more state and local transparency laws are likely to follow, especially if the current (and potentially additional) legal challenges to the federal CTA ultimately succeed in repealing, revising, or narrowing the current federal legislation.

Act Now

While these legal challenges and state transparency laws add a new layer of complexity to the federal CTA, it remains just as important for businesses to ensure they continue to understand and adhere to the requirements of the CTA to avoid penalties. After all, any resolution to these legal challenges are too uncertain and far off to warrant waiting, and any new state-specific transparency laws cannot supersede the federal CTA. While our Corporate & Securities practice group continues to follow these developments, we strongly encourage you to contact Alex Jones (aej@kjk.com  216.736.7241) and Samantha Cira (smc@kjk.com; 216.736.7232) for assistance with determining how and when the CTA applies to your business.