Under the “Corporate Transparency Act” (CTA) that was passed by Congress in 2021, all entities formed or registered to do business in the United States must either comply with new disclosure requirements or confirm that they fall within certain enumerated exceptions.[1]
Specifically, by January 1, 2025, any entity labelled a “reporting company” must disclose its “beneficial ownership information” (BOI) to the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).[2] Failure to timely file a BOI report with FinCEN can subject a reporting company to a wide range of civil and criminal penalties, up to and including imprisonment for its owners.
Supporters of the CTA have argued that it is a vital step in countering money-laundering and the financing of terrorism. In addition, and as the name suggests, supporters contend that the CTS will foster transparency in corporate structures and discourage the use of shell companies as a means to disguise the movement of illicit funds.
Those opposed to the CTA, meanwhile, have argued that it is a violation of privacy and places an undue burden on small businesses. They also assert that it is a violation of the United States Constitution.
Now, the status of the CTA, and its January 2025 deadline, are in question—after a federal court in Texas issued a far-reaching ruling that prohibits the federal government from enforcing the CTA.
THE COURT’S RULING
In the federal court ruling, Judge Amos Mazzant, writing for the U.S. District Court for the Eastern District of Texas in Texas Top Cop Shop, Inc., et al. v. Garland, et al., Case No. 4:24-cv-478 (E.D. Tex.), issued a preliminary injunction that blocks the reporting regime envisioned by the CTA. In particular, the Court:
- Enjoined the CTA, generally;
- Enjoined enforcement the BOI reporting rule, in particular;
- Stayed the January 1, 2025 compliance deadline imposed by the BOI reporting rule; and
- Declared that “reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadlines pending further order of the Court.”[3]
Analyzing the CTA, the Court held that “[t]hough seemingly benign, th[e] federal mandate marks a drastic two-fold departure from history. First, it represents a [f]ederal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several states. Second, the CTA ends a feature of corporate formation as designed by various states—anonymity.” [4]
In issuing a preliminary injunction, the Court needed to find that the CTA was “likely” unconstitutional. And in considering whether Congress exceeded its authority in passing the CTA, the Court rejected the federal government’s arguments based on the Commerce Clause and Necessary and Proper Clause. Nevertheless, the Court also qualified its ruling by noting that it has yet to make “an affirmative finding that the CTA and [BOI] Reporting Rule are contrary to law or that they amount to a violation of the Constitution.”[5]
CONCLUSION
The immediate effect of the Court’s preliminary injunction is that the reporting requirements established by the CTA are unenforceable. However, the Court’s ruling only temporarily prohibits enforcement of the CTA—and is likely to be appealed by the federal government to the Fifth Circuit Court of Appeals. It is also possible that the appellate court could issue a stay order that would effectively reverse the district court’s injunction and reinstate the requirements of the CTA. And it is unclear whether any changes to the district’s court’s order would include an extension of the January 1, 2025 deadline for reporting companies.
FinCEN has yet to issue any guidance to assist the millions of legal entities subject to the CTA in the wake of this development. Reporting companies should continue to monitor their obligations, therefore, and be prepared to file any necessary reports in the event the appellate court modifies the injunction.
[1] See 31 U.S.C.A. § 5336.
[2] See 31 C.F.R. § 1010.380.
[3] Texas Top Cop Shop, Inc. v. Garland, No. 4:24-cv-00478 (E.D. Tex.), at *79 (Dec. 3, 2024).
[4] Id. at *2.
[5] Id. at *77.
*December 23 update-Updated Information on Filing Requirements Of Corporate Transparency Act