On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction in Texas Top Cop Shop, Inc., et al. v. Garland, et al., Case No. 4:24-cv-478 (E.D. Tex.), blocking the enforcement of the Corporate Transparency Act (CTA) and suspending its Beneficial Ownership Information (BOI) reporting requirements. Judge Amos L. Mazzant determined “the CTA is likely unconstitutional,” finding it exceeds Congress's constitutional authority and infringes on state rights to regulate corporate formation, as protected by the Tenth Amendment. This decision is consistent with a similar ruling by the Northern District of Alabama, which also found the CTA unconstitutional but limited its injunction to the named plaintiffs. The Eastern District of Texas ruling comes just weeks before the January 1, 2025, compliance deadline for entities formed before 2024.
Background on the Corporate Transparency Act
Enacted in 2021, the CTA requires corporations, limited liability companies, limited partnerships, and similar entities to disclose information about their beneficial owners (substantial owners and control persons) to the Financial Crimes Enforcement Network (FinCEN) unless they qualify for one of a limited number of exemptions. The primary objective is to combat money laundering and other illicit financial activities by increasing transparency in entity ownership. FinCEN estimates over 32.5 million companies will need to file BOI reports before 2025, with an additional 5 million filings expected annually, excluding any amendments to previously submitted reports.
Implications for Businesses
The nationwide preliminary injunction has suspended the requirement for reporting companies to submit BOI reports to FinCEN. Entities preparing to meet the January 1, 2025, compliance deadline now face uncertainty regarding compliance obligations. While the injunction remains in effect, FinCEN cannot enforce the CTA’s reporting requirements. However, this suspension could end if the injunction gets overturned on appeal or if there are further legal developments.
Next Steps
The Department of Justice has not yet indicated whether it will appeal the decision. As a preliminary injunction, the court order may be reconsidered, altered, or lifted if there are significant changes in circumstances. The ruling could also face further judicial review, potentially reaching the U.S. Court of Appeals for the Fifth Circuit or the U.S. Supreme Court. Businesses should stay updated on the ongoing legal developments that might impact their compliance requirements.
Recommendations for Businesses
Stay Informed: Regularly monitor updates from FinCEN and legal advisories to keep track of changes to the CTA’s status.
Evaluate Compliance Plans: Prepare for potential compliance requirements while considering the current injunction’s implications.
Seek Legal Advice: Consult legal counsel to understand how ongoing developments may affect your specific obligations under the CTA.
This preliminary injunction creates considerable uncertainty about the future of the CTA’s reporting requirements. Entities should remain attentive and proactive, recognizing that ongoing legal developments could alter current compliance obligations.
No Effect on State Laws
The court’s ruling does not impact state-level initiatives for ownership disclosure. For example, Florida does not currently require filings similar to the CTA. However, several other states have begun adopting laws that mandate reporting ownership and control of information at the state level. These laws often apply to entities formed within those states and out-of-state companies registered to do business there.
If your company is based in Florida but operates in other states, be aware of potential state-level compliance requirements. It is essential to monitor these developments to avoid any inadvertent non-compliance.
Here to Help
Check FinCEN’s website here for more details to ensure your business meets the upcoming deadlines. If you have any questions, we are here to help. We build value-added relationships with each client to understand their business structure to provide solid solutions, and our approach offers direct access to the firm's decision-makers. Our innovative cross-functional services help businesses address the challenges ahead.
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