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What Happened?
On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction blocking enforcement of the Corporate Transparency Act (“CTA”) and its implementing regulations. As a reminder, the CTA requires that many closely held companies doing business in the United States disclose certain information about their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”). Further information on the CTA and its requirements can be found in KWGD’s original alert at https://www.kwgd.com/news/the-corporate-transparency-act-2/.
The case, Texas Top Cop Shop v. Garland et al. (Case 4:24-cv-00478), centers on constitutional challenges to the CTA, including claims that Congress overstepped its legislative authority, and that the CTA infringes on certain constitutional protections. The plaintiffs, including small business owners and a trade association, argued that the CTA compels speech by requiring disclosure of private beneficial ownership information and raises privacy concerns about the use and protection of such data. In its opinion, the court stated that the Government failed to demonstrate how the CTA fits within Congress’s constitutional authority and described the law as “likely unconstitutional.” The court further noted the significant burden the CTA places on companies, with compliance costs projected to exceed $22 billion in the first year alone.
As a result, the injunction halts the impending January 1, 2025, deadline for companies formed prior to 2024 to report beneficial ownership information to FinCEN, and Companies subject to the CTA are not currently required to comply with the reporting requirements while the injunction remains in effect.
What Comes Next?
The injunction introduces significant uncertainty regarding the CTA’s enforcement timeline and broader future. In response to the federal court order, FinCEN has posted an alert on its filing portal confirming that Reporting Companies are not currently required to file Beneficial Ownership Information Reports (“BOIR”) and will not face liability for failure to do so while the injunction is in effect. The FinCEN BOIR filing portal remains operational, and Reporting Companies may continue to file BOIR voluntarily should they choose to do so.
The Department of Justice, on behalf of the Department of the Treasury, has entered a notice of appeal in the case appealing the injunction halting implementation of the CTA to the U.S. Court of Appeals for the Fifth Circuit. Due to the uncertainty of the outcome of the case, reporting companies may wish to continue to review their obligations under the CTA, including identifying beneficial owners and gathering information that would be required for any BOIR filings, in the event the preliminary injunction is stayed or reversed. Reporting companies should also continue to monitor for additional updates or guidance regarding the CTA.
What Does This Means for Your Company?
While enforcement of the CTA is on hold for now, companies should carefully consider what steps, if any, they need to be taking in the interim.
1. Delay Filing: Reporting Companies are not currently required to submit BOI reports. However, compliance obligations may be reinstated if the injunction is overturned.
2. Continue Preparing: Companies should continue gathering information on their beneficial owners and ensuring they understand the CTA’s requirements. If the injunction is lifted, businesses may need to act quickly to meet deadlines.
3. Monitor Legal Developments: Stay informed about the status of the case and any appeals, as the scope and timing of compliance requirements could change.
Our office is closely tracking these developments and is available to assist with tailored advice as the situation evolves. If you have questions about how the CTA or this injunction impacts your organization, please contact us for guidance.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
Written by:
Matthew R. Hull and Nathan C. Newcomer
Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.
330-497-0700
mhull@kwgd.com, nnewcomer@kwgd.com