On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued an injunction temporarily blocking enforcement of the Corporate Transparency Act (the “CTA”) (31 U.S.C. Sec. 5336). Specifically, the injunction suspends the requirement that businesses submit their beneficial ownership information (BOI) report to FinCEN, a federal government agency.
For companies formed prior to 2024, this ruling halts their obligation to submit their initial BOI reports to FinCEN before the January 1, 2025, deadline. For businesses created in 2024, the ruling removes their obligation to report within 90 days of formation.
A Refresher: What is the CTA?
The CTA requires all businesses formed in the United States (and foreign businesses operating in the U.S.) to report information about the company’s owners to a federal database maintained by FinCEN, the agency responsible for upholding national security as it relates to financial matters. This is the first ever requirement for companies to disclose their ownership information, and as such it marks a major shift in the compliance obligations for businesses.
Under the CTA, all corporations, limited liability companies, and any other business entity that registers with a state’s Secretary of State office must disclose their “beneficial owners” through the filing of a “beneficial ownership information report.” A “beneficial owner” is an individual who owns or controls at least 25% of a company or exercises “substantial control” over the company. In practice, virtually any individual with decision-making authority for a business must be disclosed. Certain entities, such as banks, insurance companies, and tax-exempt entities, are exempt from reporting, due to existing oversight from government agencies.
The Texas Ruling
The federal judge in Texas Top Cop Shop v. Garland et al. (case 4:24-cv-00478, December 3, 2024) issued a nationwide injunction against enforcement of the CTA. In his ruling, Judge Amos Mazzant determined that the CTA was likely unconstitutional. Judge Mazzant noted that the law was an attempt by the federal government to legislate in an area traditionally left to the states, since companies are formed pursuant to state law.
Further, many states provide for anonymity during the entity formation process, which is a state law choice. This, according to the ruling, should be left to the states, and by enacting the reporting requirements under the CTA, the federal government has overstepped its authority. The opinion also noted that Congress had no authority under its powers to regulate commerce, taxes, and foreign affairs to adopt the CTA and that it likely violated states' rights under the U.S. Constitution's Tenth Amendment.
What Now?
The Texas ruling suspends companies’ obligations to file the report prior to the January 1, 2025 deadline. This ruling will likely be appealed, and may be reversed or vacated. If so, the CTA reporting requirements will be reinstated. Businesses should monitor the status of the litigation and be ready to file their report if they have not already done so.