Table of Contents:
BREAKING – Motion to Stay – Pending Response from Fifth Circuit
UPDATE: Originally anticipated to respond by 12/16, but now should be soon, and by 12/27.
Court order on removing preliminary injunction could be resolved any day, and likely before 12/27. Read the court update here: Texas Top Cop Shop v Garland et al (Motion to Stay 12-12-2024)
In a landmark decision, the U.S. District Court for the Eastern District of Texas has issued a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (CTA) in the case Texas Top Cop Shop v Garland et al. (case 4:24-cv-00478, December 3, 2024). This ruling could turn into permanent, significant implications for small businesses across the country, as the court questions the constitutionality of the Corporate Transparency Act (CTA) and its impact on business operations. On December 5, just two days after the ruling, the U.S government filed an appeal to the U.S Court of Appeals for the Fifth Circuit against the preliminary injunction.
An important fact to take away from the injunction is that the CTA was not ruled unconstitutional and is not necessarily gone for good.
Nationwide Impact of Injunction on CTA Reporting
Although the plaintiffs called for the injunction to apply only to them, the Court ultimately decided that the preliminary injunction be applied nationwide, explaining that the broad impact of the CTA calls for uniform relief. Approximately 32.6 million businesses are affected, unlike the previous Alabama District Court ruling in March of 2024 that only affected the plaintiffs.
Guidance for Businesses and Professionals
Many business owners and advisors are now questioning what their next steps should be. Here are a couple of possibilities:
Continue Preparation:
Some might decide to continue gathering beneficial ownership information without filing, to be prepared if the CTA is reinstated. Determining beneficial owners and substantial control—and gathering the necessary information—is a time-intensive process. Pausing these efforts, especially with traditional year-end busy seasons for advisors approaching, may not be viable. If the preliminary injunction is overruled in the last week of December, business owners and professionals could be in a mad scramble to get everything and filed in a timely manner. FinCEN’s filing system may even experience issues with the volume of reports trying to be filed. Alternatively, if the preliminary injunction was overturned in February 2025 for instance, all reports previously due January 1, 2025 could be due immediately upon the overturn of this injunction – leaving FinCEN or Congress with the opportunity but no guarantee of offering filing deadline relief.
Pause and Monitor:
Others may decide to wait for further developments before continuing preparation of Beneficial Ownership Information Reports. If the CTA is ultimately ruled unconstitutional and not replaced with a modified version of the law by Congress, ceasing work could avoid unnecessary effort and expenditure. Ultimately, this approach only makes sense however if the amount of work required is manageable if a last-minute scramble scenario arises.
No matter how you proceed, proactive communication with clients and other beneficial owners is critical. As with any compliance issue, your clients rely on you to keep them informed about compliance changes and how they affect them. Whatever happens next, it’s good to remind your clients to amend operating agreements that are out of date, or any other maintenance that may have been discovered during this information gathering and review process.
Possible Future Directions
The path forward for the CTA is uncertain and could take several directions:
Delay:
Multiple courts have rejected requests for injunctions, holding that the Corporate Transparency Act is constitutionally defensible. If ultimately the CTA is sustained as current legal actions play out, it is possible that FinCEN or Congress could institute a short delay or extension of deadlines prior to enforcing compliance.
State-Level Action:
Some states may consider creating their own Beneficial Information Reporting systems (for instance – New York’s new law that has a 1/1/2027 reporting due date), creating a modified state-level filing system.
Repeal and Redo:
If the CTA as currently enacted is ultimately held to be unconstitutional, it is highly likely that Congress could enact a modified and constitutionally permissible version of the law. The U.S. faces pressure from the international banking system to have sufficient beneficial ownership rules in place (similar to most other developed nations), and it seems probable that some modified version of the CTA would be enacted if the current version was ultimately held to be unconstitutional.
Modified Filing Requirements:
Given the impact of the CTA on small businesses in particular, it is possible that Congress enacts additional exemptions to apply to a larger swath of “Main Street” small businesses. Other possible changes could include turning the reporting into an annual filing requirement and extending the deadline timelines for updates and new companies.
Conclusion
The nationwide preliminary injunction against the CTA is a significant development, introducing uncertainty for small businesses and advisors. The CTA has not ultimately been determined as unconstitutional and its requirements may be reinstated depending on legal outcomes. Businesses should prepare for all scenarios, including a potential overturn of the injunction and compressed filing deadlines.
As the legal challenges progress, staying informed and ready to adapt is crucial. The future of Beneficial Ownership Information Reporting remains uncertain, and further updates will help guide the path forward for businesses and advisors.
