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Corporate Transparency Act Update
Federal Court Blocks Enforcement of Corporate Transparency Act by Issuing Nationwide Preliminary Injunction
The Corporate Transparency Act (CTA), which went into effect on January 1, 2024, requires most entities in the United States to submit personal information about its beneficial owners to the United States Department of Treasury’s Federal Crimes Enforcement Network (FinCEN). As explained in our earlier article, the CTA was intended to provide essential information to various governmental agencies and financial institutions to help prevent terrorism, drug trafficking, fraud, corruption and money laundering in the U.S.
On December 3, 2024, the Federal District Court for the Eastern District of Texas issued a significant ruling in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., granting a preliminary injunction that temporarily stops enforcement of the CTA and its beneficial ownership information (BOI) reporting obligations. The Court’s decision was based on its belief that the CTA is likely unconstitutional as falling “outside of Congress’s power” to enact because corporate regulation traditionally has been controlled by the states, not the federal government. While the injunction is in place, reporting companies do not need to meet the January 1, 2025, deadline for submitting beneficial ownership reports for entities formed prior to January 1, 2024. Similarly, entities formed after January 1, 2024, are not required to comply with the 90-day compliance deadline.
The Court noted both the CTA and the BOI reporting rule affect approximately “32.6 million existing reporting companies.” One of the plaintiffs, the National Federation of Independent Business (NFIB), represents nearly 3,000,000 small business owners that are party to this case. As a result, the court explicitly determined the preliminary injunction would apply nationwide.
What’s Next and What Does This Mean for Your Business?
The Court’s decision is not a final determination of the CTA’s legality. The injunction only temporarily prevents the U.S. Department of Treasury from enforcing the CTA while the case proceeds. The final outcome of this case remains uncertain, as the U.S. Department of Treasury will likely appeal the decision to the Fifth Circuit Court of Appeals. For the time being, businesses are not required to comply with the CTA’s BOI reporting requirements and do not need to meet the previously established deadlines for submitting beneficial ownership reports. If the Court’s decision is later overturned on appeal, CTA enforcement will resume and reporting companies that have not yet filed with FinCEN should be prepared to comply with any regulations and deadlines issued by FinCEN. No immediate action is required for business that have already filed with FinCEN.
As the case progresses, business owners will need to watch for updates, as the Court will likely determine on appeal whether the CTA’s requirements violate constitutional rights or if its reporting obligations will stand.
For questions regarding CTA, please contact Mr. Bluhm or Ms. Lowe.
Andrea Almeida Rodriguez, a law clerk with Eastman & Smith, contributed to this article. She is a recent graduate of the University of Toledo.
Update:
For information on the December 23, 2024, and December 26, 2024, court rulings, please view "Corporate Transparency Act Compliance Still on Hold."
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Disclaimer: This alert has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.