Client Alert: Texas Federal Court Blocks Corporate Transparency Act Enforcement: What It Means for Your Business
December 10, 2024
In a recent landmark ruling, a federal court in Texas has issued a preliminary injunction temporarily halting enforcement of the Corporate Transparency Act (“CTA”), raising significant questions about federal power and corporate obligations. The preliminary injunction was issued by the U.S. District Court for the Eastern District of Texas in Texas Top Cop Shop, Inc., et al. V. Merrick Garland, with the court stating that the CTA is “likely unconstitutional as outside of Congress’s power.” This decision, if upheld, could reshape how businesses across the nation handle their CTA filing obligations (or, potentially, lack thereof). It is possible that this lower court injunction could be overturned by the Fifth Circuit Court of Appeals or the United States Supreme Court. FinCEN has since published an alert stating:
In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
What Is the Corporate Transparency Act?
The CTA, enacted in 2021, aims to combat financial crimes by requiring small and medium-sized companies to disclose detailed information about their “beneficial owners” on a confidential basis (i.e., the information is not publicly available, but is available to government agencies). The reporting individuals generally must have significant control or ownership stakes (generally over 25%) in the reporting company. The law directs companies to submit this data to the Financial Crimes Enforcement Network (FinCEN), creating a nonpublic database accessible to law enforcement.
Why Was the Law Challenged?
Several plaintiffs, including small businesses and trade associations, argued the CTA is unconstitutional. They claimed it intrudes on states’ rights to regulate business entities, violates privacy rights, and compels speech without sufficient justification. They also raised concerns about the compliance costs, especially for small businesses.
The Court’s Decision
The court granted a preliminary injunction, effectively pausing the CTA’s enforcement nationwide. It found the plaintiffs are likely to succeed on constitutional grounds. The decision focused on two key issues:
- Federal Overreach: The court questioned whether Congress had the authority to impose these requirements, given that corporate formation and governance have traditionally been state responsibilities.
- Privacy and Free Speech: The mandatory disclosure of personal information about business owners was seen as potentially violating the First and Fourth Amendments.
Ultimately, the court agreed with the Plaintiffs in the case and issued the injunction stopping the enforcement of the CTA and determining that it is likely unconstitutional.
What This Means for Businesses
The CTA applies to millions of businesses. If enforced, it requires detailed filings, including names, addresses, and identification numbers of beneficial owners, with updates for changes. Noncompliance could result in significant fines or even criminal charges.
While the injunction delays these requirements, businesses should remain informed. If the CTA survives legal challenges, companies will need to prepare for compliance, which could involve legal and administrative costs on a very compressed timeline. While there is no present requirement for reporting companies to file their beneficial ownership information, reporting companies may continue to voluntarily submit beneficial ownership reports, which would be the conservative approach. It is unclear the likelihood of whether this injunction will stand or be overturned on appeal, and how quickly that could occur.
National Implications
This case underscores a broader tension between federal and state powers. It also highlights privacy concerns in the digital age, where sensitive data can be vulnerable despite government assurances of confidentiality. The court balanced those competing interests and found that the CTA infringed on the rights of both the States and individuals in a broad overreach by Congress.
It is important to note that Federal district court judges in Oregon, Michigan and Virginia have denied motions for preliminary injunctions. A narrower injunction by a Federal district court judge in Alabama is currently on appeal before the 11th Circuit Court of Appeals.
For businesses, this ruling offers temporary relief but also uncertainty. Companies must monitor developments as higher courts weigh in, potentially setting nationwide precedents for corporate regulation and data privacy.
Please contact a member of the CFDB team for any inquiries relating to this matter.
Andrew Gilbert
Partner
agilbert@crokefairchild.com