CTA Ruling Poses Uncertain Future for States With Similar Laws

An Alabama federal judge’s ruling this month that the Corporate Transparency Act is unconstitutional may cause ripples throughout the legal system. Although the ruling applies narrowly to the plaintiffs in National Small Business United v. Yellen, states that have passed or are considering their own version of the CTA likely will feel the effects as the case is appealed.

New York was the first state to develop and enact its own CTA equivalent, but it surely won’t be the last. California and Maryland are actively considering their own bills, with other states also likely to introduce legislation this year.

The result could be a patchwork of state laws requiring different information from beneficial owners as a protracted battle over how the federal CTA plays out in courts.

While the New York LLC Transparency Act, or NYLTA, roughly parallels the federal version, differences between the two laws underscore thorny compliance issues to come. First, the federal law applies to all entities formed or registered to do business in the US. The New York law applies to fewer entities—LLCs formed or registered to do business in the state.

However, the New York law mandates reporting by all LLCs operating in the state regardless if they are exempt. This is a key difference. An exempt entity under the CTA doesn’t need to report anything, whereas a New York LLC has to report which exemption applies.

More significantly, as written and signed into law, the New York law will create a publicly accessible database of the names of beneficial owners of LLCs. Under the federal law, beneficial ownership information collected by the Financial Crimes Enforcement Network is retained within a private database. This database is available only to federal, state, and foreign law enforcement entities as necessary, as well as some financial institutions with proper purposes.

The NYLTA collects the same information and affords access to the same parties with a caveat—the public will be able to access the names of beneficial owners.

Unsurprisingly, this aspect of the law has caused consternation among privacy-minded individuals owning and operating LLCs within New York. Upon signing the NYLTA into law, Gov. Kathy Hochul (D) released a memorandum announcing her agreement with the legislature to restrict access to beneficial ownership information to law enforcement entities. However, there hasn’t yet been a timeline for when this will occur.

The ruling in NSBU v. Yellen underscores this friction between individual privacy rights and government efforts to regulate businesses. Judge Liles Burke of the US District Court for the Northern District of Alabama found Congress’ objective—to stop financial crimes—"sensible and praiseworthy.” Still, he ruled that the CTA was unconstitutional.

However, Burke granted summary judgment based solely on the grounds that Congress exceeded its enumerated powers, without considering the plaintiff’s claims under the First, Fourth, and Fifth Amendments.

That means that even if NSBU v. Yellen is appealed to the Supreme Court—and the CTA is struck down—the New York law would likely stand because the state legislature has regulatory authority within New York that Congress doesn’t. Instead, a separate legal challenge would have to be mounted against the NYLTA considering questions that Burke didn’t.

With so much uncertainty, some businesses might choose to wait until closer to the CTA filing deadline to register beneficial owner information with FinCEN. Businesses that existed prior to 2024 have until Jan. 1, 2025, to comply.

But newly formed entities won’t be able to wait out the clock, as the federal law requires them to report their initial beneficial ownership information within 90 days of filing. And if the entity is registered in or does business in New York, the state law will make providing beneficial ownership information a condition of forming or registering an LLC, starting later this year.

Finally, as businesses and their counsel assess what to do about the CTA, the NYLTA, and any other applicable state laws, the cost of noncompliance must be considered.

The CTA assesses strict penalties—$591 per day, up to $11,820 per occurrence, as well as up to two years of jail time. It also imposes fines of up to $250,000 for the misuse of beneficial ownership information.

In New York, an LLC that fails to report required beneficial ownership information within 30 days will be deemed past due on the records of the New York State Department of State. A reporting company that fails to report required beneficial ownership information will be deemed delinquent, which carries a civil penalty of $250.

While the New York law is less punitive than the federal one, not being in good standing with the state is likely to come with a host of other business difficulties.

It’s unclear whether NSBU v. Yellen will halt efforts in other states to develop a beneficial ownership reporting framework. California and Maryland seem poised to go in New York’s direction, requiring more information from beneficial owners. Other states may see the legal challenge as an indicator that theirs should be a more relaxed approach.

The case is Nat’l Small Bus. United v. Yellen, C.C.N.D. Ala., 5:22-cv-1448-LCB, 3/1/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Marc Weintraub is partner at Stinson, focusing on high-stakes commercial transactions and litigation.

Zachary Taylor is an attorney at Stinson, focusing on corporate governance, complex business transactions and contracting matters.

Write for Us: Author Guidelines