The Corporate Transparency Act – Is it on Life Support?

By Brett W. Johnson, John G. Weston, Garth D. Stevens, Kenneth Ashton, Sarah Hibbard, and Adam J. Greenup

In Texas Top Cop Shop, Inc. et al. v. Merrick Garland, a U.S. District Court in Texas has issued a potentially major setback to the continued application of the Corporate Transparency Act (CTA), which became effective on January 1, 2024. The CTA was passed in 2021 to help gather information to assist in the support of anti-money laundering and anti-terrorism investigations and enforcement of related laws. However, the CTA required onerous reporting requirements for companies, while providing exceptions for large entities. The anticipated impact of the CTA on investment entities, small businesses, and other complex structures related to corporate governance was considered significant.

The significant amount of resources already spent on compliance may have been for naught. On December 3, the Eastern District of Texas granted a nationwide preliminary injunction (i) enjoining the CTA, (ii) enjoining enforcement of the Reporting Rule by the Financial Crimes Enforcement Network (FinCEN) (the Treasury Department’s enforcement arm), and (iii) staying the January 1, 2025, compliance deadline for subject entities formed prior to January 1, 2024, to submit beneficial ownership information (BOI) reports. Unlike the injunction issued by the Alabama Federal District Court in the National Small Business United v. Yellen decision, which had limited application to a particular trade association, the nationwide preliminary injunction effectively prevents the government’s ability to enforce the requirements of the CTA against millions of entities that are otherwise obligated to file BOI reports with FinCEN.

Prior to the December 3, 2024, ruling, any entity created or registered to do business in the United States prior to January 1, 2024, was required to file a BOI report with FinCEN by January 1, 2025, unless one of 23 enumerated exemptions applied. As well, any non-exempt entity (referred to under the CTA as a “reporting entity”) formed in 2024 was required to file a BOI report within 90 days after its formation date, and any reporting entity formed after 2025 was required to file a BOI report within 30 days after its formation date. Reporting entities who fail to timely file a BOI report with FinCEN are subject to potential civil and criminal penalties.

The Underlying Lawsuit and Ruling

In May 2024, a group of small businesses and one private individual filed a lawsuit claiming that Congress exceeded its authority under the Constitution when it passed the CTA. The Plaintiffs argued that the CTA’s requirements, such as the mandatory reporting of beneficial ownership information, violated their constitutional rights under the First, Fourth, Ninth, and Tenth Amendments. They also contended that the law imposed significant compliance burdens on small entities, with nonrecoverable costs that constitute irreparable harm.

The court’s opinion, running approximately 79 pages, spent a large focus on the question of standing and the interpretation of the Commerce Clause of the U.S. Constitution that authorizes Congress to regulate interstate commerce.

While the court stopped short of declaring the CTA unconstitutional, it did find that the plaintiffs satisfied their burden by demonstrating a substantial likelihood of success on the merits of their claims and that the harm of compliance costs outweighed any potential government interest. The court stated, “Whether the CTA and the Reporting Rule are absolutely unconstitutional is a question for another day.” However, the court further found “Because Plaintiffs have met their burden to show that they will suffer unrecoverable compliance costs absent emergency relief, they have met their burden to show that the CTA and the Reporting Rule threatens substantial, imminent, non-speculative, and irreparable harm.”

The court’s main critique of the federal mandate was its view that the CTA constituted federal government overreach and sought information that undermined one of the key features of corporate formation. Describing the CTA as a “quasi-Orwellian statute,” the court explained, “First, [the CTA] represents a federal attempt to monitor companies created under state law — a matter our federalist system has left almost exclusively to the several States.” The court further found that “the CTA ends a feature of corporate formation as designed by the various States – anonymity.”

Quoting the Constitution’s limitations on legislative power, the court emphasized, “Modern problems may well warrant modern solutions, but modernity does not grant Congress a roving license to legislate outside the boundaries of our timeless, written Constitution.” The decision concluded that the CTA lacked sufficient constitutional grounding and posed a credible threat to federalism and privacy rights. Consequently, the court enjoined the government from enforcing the law, pending further proceedings.

What Does this Mean for CTA Compliance?

As noted above, unlike National Small Business United v. Yellen, in which the court’s injunction against enforcement of the CTA was limited to members of the National Small Business Association, the court in the Eastern District of Texas has issued a nationwide preliminary injunction that enjoins FinCEN from enforcing the CTA against reporting companies. Therefore, under the court’s injunction “…reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”

This could mean that the estimated 32.6 million covered small businesses and other reporting entities may have additional time to comply with the CTA, if they even have to comply at all. However, this injunction was decided before a trial on the merits, which may still take place. It is uncertain how a court would determine the constitutionality of the CTA issue following an examination of all evidence and testimony, so the implication of the preliminary injunction is still unclear given the recency of the court’s decision.

At this point it is up to each reporting entity to decide if it wants to comply with the CTA’s BOI reporting requirement by the January 1, 2025, filing deadline (or other applicable filing deadlines for reporting entities formed in 2024 or thereafter), or if it wants to wait out the court process before filing any required BOI report.

While reporting entities may be able to delay filing BOI reports based on the preliminary injunction, reporting entities should monitor developments regarding this case to see if the U.S. Department of Justice (DOJ) will appeal the preliminary injunction to the U.S. Court of Appeals for the Fifth Circuit (or even the U.S. Supreme Court) to possibly restrict the scope of the district court’s injunction ruling to only the parties to the lawsuit or even reverse the determination that the Commerce Clause does not empower Congress to adopt the CTA. It is unknown at this point the basis for appeal or what the Fifth Circuit’s approach will be if appealed.

There will be opportunities to file amicus curiae briefs in Texas Top Cop Shop, Inc. et al. vs. Merrick Garland. There are also opportunities for congressional outreach regarding congressional action on the CTA. Furthermore, for those that have already reported, it is important to understand what the government may utilize the information for in regard to enforcing other laws. Companies, trade organizations, and other interested parties should take the opportunity to review the impact of the CTA on its operations and determine whether to vocalize any concerns via the courts or through the legislative process.

Snell & Wilmer will continue to carefully monitor developments around the CTA. It appears that entities rushing to comply with the CTA by year end may have some reprieve; however, entities should consider whether to continue efforts to collect necessary information for BOI reports in preparation for any change to the CTA’s current status quo.