Corporate Transparency Act Stayed
On December 3, 2024, the United States District Court for the Eastern District of Texas issued a preliminary injunction, enjoining enforcement of the Corporate Transparency Act (CTA), 31 U.S.C. §5336. The Court also stayed the January 1, 2025 reporting compliance deadline and enjoined enforcement of the related Reporting Rule. The Court’s injunction applies nationwide. Texas Top Cop Shop, Inc. et al., v. U.S. Atty. General, et al. (U.S.D.C., E. Texas, 4:24-cv-00478).
The CTA broadly regulates “reporting companies” – defined as “a corporation, limited liability company or other similar entity that is created by the filing of a document with a secretary of state or a similar office ….or of a foreign country and registered to do business in the US….“ While the CTA exempts certain entities, unless specifically exempt, the CTA required covered companies to file extensive information by January 1, 2025, subjecting individuals to significant criminal and civil penalties if a report was not filed.
In the 79-page Memorandum Opinion, the Texas Court held “neither (the CTA nor the Reporting Rule) may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025 BOI reporting deadline pending further order of the Court.” Memo. Op., at page 79.
The CTA was enacted in 2021 as part of the National Defense Act. As many businesses are aware, the CTA required many companies to disclose what is otherwise considered private stakeholder information to the Department of the Treasury enforcement arm entitled the “Financial Crimes Enforcement Network.” (FinCEN).
Under the CTA, Congress could compel these disclosures, with potential penalties of $500 a day up to $10,000 and the potential for incarceration for 2 years for failure to comply. Under the CTA, covered entities are required to file a report that identifies each beneficial owner of the company, full legal name, date of birth, addresses, and other detailed company and personal information.
The breadth of the CTA was significant, exempting only a few entitles as well as publicly traded companies that registered under Section 102 of SOX. The CTA defined a “beneficial owner” as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the reporting company.
In granting the plaintiff’s motion for preliminary injunction, the Texas Court held the CTA is likely unconstitutional as outside of Congress’s power. Because the reporting rule which implements the CTA is likely unconstitutional for the same reasons, the Court enjoined not only the CTA but its enforcement.
While the United States may appeal to the Fifth Circuit Court of Appeals, for now, the deadline for the BOI reporting requirement under the CTA is STAYED. Entities which may be covered by the CTA should consult with legal counsel as soon as possible for further guidance and direction with respect to the CTA and to ensure receipt of updates concerning any future orders from the Texas Court and any appellate activity. If you don’t know whether a particular company is covered or exempt, please consult with legal counsel promptly.