On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a preliminary (i.e., temporary) injunction staying enforcement nationwide of the beneficial ownership information (BOI) reporting requirements of the federal Corporate Transparency Act (CTA). The ruling in Texas Top Cop Shop, Inc., et al. v. Garland, et al., was issued on the ground that the CTA likely exceeds congressional authority under the Commerce Clause and the Necessary and Proper Clause, and may therefore be unconstitutional.

 

The injunction effectively cancels all compliance deadlines associated with the CTA, which had mandated that certain U.S. business organizations report their BOI to the Financial Crimes Enforcement Network (FinCEN) by specific deadlines. For entities formed before 2024, the deadline was set to expire on January 1, 2025. However, with the injunction in place, those companies are no longer required to report BOI and will not be penalized for failing to do so as long as the injunction remains in place.  

 

The U.S. Department of Justice filed a notice of appeal almost immediately, potentially telegraphing an aggressive challenge to the Eastern District’s ruling. In a statement, FinCEN pledged to comply with the injunction while the ruling remains in place but also urged companies to consider voluntarily submitting BOI reports notwithstanding the injunction.

 

Business entities should be aware of the following key points regarding the injunction and its implications:

 

•  Current Status of the CTA: The Act has not been repealed or “overruled” by the court’s ruling. The preliminary injunction merely stalls enforcement of the law temporarily while the court progresses toward its final orders, which may or may not ultimately include rulings on the constitutionality of the CTA. Companies are not required to file beneficial ownership reports while the injunction remains in effect.

• Potential Changes: If the injunction is lifted, either by the issuing court or on appeal, reporting companies may be required to comply with the original deadlines. Therefore, it is advisable for companies to prepare for the possibility of reinstated obligations. Resist the urge to delete any unfinished draft reports saved to the FinCEN BOI portal, as you may still ultimately need to file them, and potentially on short notice. While it is reasonable to expect FinCEN to provide a limited filing extension beyond the original January 1, 2025 deadline for pre-2024 filing entities in the event the injunction is dissolved or modified, there is no guarantee that will happen, and the inflation-adjusted penalty of $591 per day while not compliant should be ample incentive for business entities to be prepared for a resumption of the reporting requirement. 

• Voluntary Reporting: Reporting companies can choose to voluntarily report their BOI during the injunction period, but they are not obligated to do so. Because of the uncertainty surrounding the Act and the stiff penalties for noncompliance, entities declining to file at this time would be well-advised to determine whether they are “reporting companies” under the Act and identify their beneficial owners to ensure readiness in the event reporting enforcement comes back online.  

• Monitoring Developments: Companies should closely monitor the progress of the appeal and any further court rulings regarding the CTA, which can be expected to significantly impact reporting obligations and deadlines. Given the complexities surrounding the CTA and the ongoing litigation, companies are encouraged to seek legal counsel to navigate their obligations and ensure compliance in the event the rules are reinstated. 

 

In summary, while the preliminary injunction provides temporary relief from the CTA’s reporting requirements, organizations should remain vigilant and prepared for potential changes in the legal landscape. Business entities should consider their options carefully and consult with legal professionals to ensure they are ready to respond to any additional developments regarding the CTA.

Learn more about our Corporate Law practice, and contact Condon Tobin Member and author of this alert, Jacob W. Stasny, for clarity and tailored guidance. 

 

Disclosure

The information provided in this press release is for general informational purposes only and should not be construed as legal advice. It does not establish an attorney-client relationship, nor is it a substitute for consulting with a qualified attorney regarding your specific legal needs. Readers are encouraged to seek legal counsel for guidance related to their unique circumstances.