The Corporate Transparency Act, the law’s formal name, was passed as part of annual defense spending legislation and signed into law last year. It requires companies with 20 or fewer full-time employees and less than $5 million in sales to submit information about their so-called beneficial owners. It also requires the Treasury to create a database of the information, which law-enforcement agencies will be able to use to investigate financial crimes.

The lawsuit names as defendants the US Treasury Department, Treasury Secretary Janet Yellen and Himamauli “Him” Das, acting director of the Treasury’s Financial Crimes Enforcement Network, which is tasked with implementing the law.

FinCEN, the US’s anti-money-laundering regulator and financial intelligence unit, is charged with building the corporate-ownership database. In September, it published what it said would be the first of three rules governing the new registry.

A FinCEN spokeswoman declined to comment on the lawsuit.

The NSBA was an early opponent of the corporate transparency bill, arguing it would impose undue costs on small businesses. The group filed its lawsuit with Isaac Winkles of Huntsville, Ala., who owns a small business managing real-estate properties.

In the lawsuit, the two plaintiffs argue the shell-company law imposes a “law enforcement dragnet of sweeping proportions” on small businesses, without identifying any pre-existing legal basis that would justify the requirement to submit personal information.

One critical flaw of the legislation, according to the NSBA, is that it doesn’t seek to regulate commercial activity, a power expressly granted to Congress. Company formation isn’t a commercial activity, the group says in its suit.

The lawsuit poses a new challenge to FinCEN, which has already missed the mandated timeline for launching the corporate-ownership database. In April, Mr. Das told members of the House Committee on Financial Services the Treasury bureau didn’t have the staffing needed to implement the legislation on time. In May, Congress approved a one-time funding infusion to FinCEN as part of a military and economic aid package passed in response to Russia’s invasion of Ukraine.

In addition to setting up the corporate-transparency database, the law also requires FinCEN to take a number of other steps—a whistleblower award program, among others—to strengthen the US’s anti-money-laundering safeguards.

Write to Dylan Tokar at [email protected]