New federal rules that went into effect in January and require more than 32 million businesses to report the personal information of business owners to a new federal database have been struck down.

Federal District Court Judge Liles Burke ruled earlier this month that the Corporate Transparency Act is unconstitutional, marking the end of a 16-month legal battle led by the National Small Business Association and supported by S-Corp and the members of its Main Street Employers coalition. In his March 1 ruling, Judge Liles wrote:

When Congress passed the 2021 National Defense Authorization Act, it included a bill called the Corporate Transparency Act (“CTA”). Although the CTA made up just over 21 pages of the NDAA’s nearly 1,500-page total, the law packs a significant regulatory punch, requiring most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm.

By requiring these disclosures, Congress aimed to prevent financial crimes like money laundering and tax evasion, which are often committed through shell corporations. Broadly defined, a shell corporation is a legal entity with no (or minimal) employees, customers, business, or assets. Although shell corporations serve many legitimate purposes, it’s also possible to disguise the identity of interested individuals and the flow of money by layering shell companies on top of each other, “such that each time an investigator obtains ownership records for a domestic or foreign entity, the newly identified entity is yet another corporate entity, necessitating a repeat of the same process[.]” Pub. L. 116-283 § 6402(4).

Yet corporate formation includes far more than for-profit enterprise. Each year, the States grant formal status to millions of entities that can and do serve “any lawful purpose,” including benefit corporations, non-profits, holding companies, political organizations, and everything in between.

With that in mind, this case presents a deceptively simple question: Does the Constitution give Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a State? The Government thinks so. While it acknowledges that Congress “can exercise only the powers granted to it,” the Government says that the CTA is within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations.

The Government’s arguments are not supported by precedent. Because the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals, the Plaintiffs are entitled to judgment as a matter of law. As a result, the Court GRANTS the Plaintiffs’ motion for summary judgment and DENIES the Government’s motion to dismiss and alternative cross-motion for summary judgment.

National Small Business United d/b/a the National Small Business Association et al., vs. Janet Yellen, in her official capacity as Secretary of the Treasury, et al.

While the fight is not over, as the U.S. Department of Justice is very likely to appeal the ruling, for now, millions of small business owners have been freed from navigating the Financial Crimes Enforcement Network’s website and can get back to running their businesses.