On December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a preliminary injunction against enforcement of the Corporate Transparency Act (CTA) and its implementing regulations. However, unless/until a Court grants a permanent nationwide injunction, SyndicationCounsel advises clients to mitigate the risk of enforcement uncertainty by timely filing BOIRs.

What is the Corporate Transparency Act?

The CTA, effective January 1 2024, mandates that certain corporations, limited liability companies, and other similar entities submit beneficial ownership information reports (BOIRs) to the Financial Crimes Enforcement Network (FinCEN). This includes personal data such as names, addresses, and government-issued identification numbers of individuals who meet the definition of "beneficial owners." Non-compliance can result in severe civil and criminal penalties, including fines of $500 per day and up two years’ imprisonment.

"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."

In Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478 (E.D. Tex. Dec. 3, 2024), plaintiffs alleged that the CTA falls outside of Congress’s powers to regulate interstate and foreign commerce because it regulates incorporated entities regardless of whether they engage in commercial activity. The Court agreed, holding:

1. The CTA imposes significant compliance burdens, particularly on small businesses.

2. Plaintiffs demonstrated a likelihood of success in their claims that the CTA infringes upon constitutional protections under the First, Fourth, Ninth, and Tenth Amendments.

3. The enforcement of the CTA could cause irreparable harm due to the compliance costs and potential penalties.

Interestingly, one of the Justice Department’s arguments backfired in spectacular fashion. Among the named plaintiffs is the National Federation of Independent Business (NFIB), a 501(c)(3) nonprofit that advocates for the interests of small U.S. businesses owners. The DOJ argued that granting the injunction to the 300,000 member NFIB would -in “practical effect”- grant a nationwide injunction. The Court took this point as its cue to expand the scope of the injunction from the six named plaintiffs to the approximately 32.6 million companies targeted by the CTA! A copy of the decision is attached for reference.

Implications for Businesses

This nationwide injunction immediately suspends enforcement of the CTA across the United States. However, the injunction is preliminary, meaning this Court or the Fifth Circuit Court of Appeals could lift the injunction at any time. Additionally, CTA litigation is pending in the Eleventh Circuit Court of Appeals. If the preliminary injunction is stayed, or narrowed to the Fifth Circuit (covering Texas and neighboring states), or if the Eleventh Circuit upholds the constitutionality of the CTA, then businesses that have not timely filed an initial BOIR could suddenly find themselves exposed to an enforcement action.

Conclusion: An Ounce of Prevention is Worth a Pound of Remedy

Unless/until a federal court delivers a permanent nationwide injunction, the risk of civil and criminal liability for CTA noncompliance greatly outweighs the cost of filing an initial BOIR. To mitigate the risk of enforcement uncertainty, SyndicationCounsel advises clients to proceed with timely filing BOIRs. If you have questions about how this decision impacts your business or need assistance with compliance planning, please contact us. This alert is for informational purposes only and does not constitute legal advice. Please consult a qualified attorney for advice on specific legal matters.