Authored by Corporate Practice Group partner Lorren Patterson and corporate attorneys Paul-Kalvin Collins and Japera Parker

**UPDATE As of December 12, 2024: FinCEN Responds to Nationwide Preliminary Injunction of CTA Enforcement **

Introduction

The Corporate Transparency Act (“CTA”) requires most companies—except for certain exempt entities—to disclose their ownership details to the Financial Crimes Enforcement Network (“FinCEN”). A looming January 1, 2025 reporting deadline for entities formed prior to January 1, 2024 had many companies and compliance departments on edge. But mere weeks before this deadline, a federal court issued a nationwide injunction, preliminarily enjoining the CTA’s enforcement and staying reporting requirements. This temporary relief gives businesses that have yet to submit their information to FinCEN a welcome pause, although this could change rapidly depending on the government’s next steps.

In this article, we break down the outcome of the ruling and explain how it could affect your business, whether you have already filed your information with FinCEN or were preparing to do so by the end of the year.

Texas Federal Court Steps in and Gives a (Temporary) Holiday Gift

On December 3, 2024, in Texas Top Cop Shop, Inc., et al. v. Garland, et al., Case No. 4:24-cv-478 (E.D. Tex.), the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction temporarily prohibiting the enforcement of the CTA and the FinCEN Reporting Rule.

The CTA and Reporting Rule require domestic entities created by the filing of a document with a secretary of state and foreign entities that have registered to do business in the United States (“Reporting Companies”) to file a Beneficial Ownership Information (“BOI”) Report with FinCEN, identifying personal information about the individuals who directly or indirectly own a certain percentage or otherwise control the company, subject to certain exemptions from reporting.

The Court’s decision temporarily halts the CTA’s reporting requirements and enforcement mechanisms for all Reporting Companies across the United States, providing a potential reprieve to approximately 32.6 million entities that were preparing to comply with the January 1, 2025 deadline.

Comparison to the Northern District of Alabama Ruling

This is not the first time a federal court has taken issue with the CTA. In March 2024, the U.S. District Court for the Northern District of Alabama in National Small Business United v. Yellen, Case No. 5:22-cv-01448 (N.D. Ala.), ruled that the CTA was unconstitutional, finding that it exceeded Congress’s enumerated powers under Article I of the Constitution. However, the court limited its relief to the plaintiffs in that case, including the National Small Business Association and its members. The Alabama lower court decision is now on appeal and will likely be decided in the coming months.

By contrast, the Texas Top Cop Shop ruling applies nationwide, preventing enforcement by the federal government of the CTA and its reporting requirements, including the compliance deadlines, against all Reporting Companies across the United States, not just the named plaintiffs. The sweeping reach of the injunction reflects the Court’s determination that the law raises significant constitutional concerns. Specifically, the Court ruled that the CTA likely violates the Commerce Clause and the Necessary and Proper Clause of the U.S. Constitution, which may signal that the plaintiffs have a strong case on the merits. While this injunction is a critical development, it remains a preliminary order, subject to immediate appeal or other relief.

While the courts’ reasonings were quite similar, this ruling differs significantly in scope from National Small Business United v. Yellen. In that case, the enjoinment of CTA compliance was limited to the named plaintiffs. The nationwide scope of the Texas Top Cop Shop ruling underscores its broader implications and highlights the ongoing judicial scrutiny surrounding the CTA’s constitutionality.

What Lies Ahead?

Although the injunction suspends enforcement for now, Reporting Companies should note the following key points:

1. Appeal Likely: An appeal to the Fifth Circuit Court of Appeals should be anticipated, and, in such a case, further appeal to the Supreme Court of the United States is certainly foreseeable. The government may also ask for an emergency stay of the injunction during pendency of the appeal (and if left in place, the government could then seek emergency relief in the Supreme Court). All of this, of course, could result in the reinstation of the CTA’s reporting requirements, in whole or in part, at a moment’s notice.
2. Ongoing Legal Uncertainty: This ruling is not a final decision on whether the CTA is constitutional or whether the CTA’s reporting requirements may continue in some modified fashion. It only temporarily halts filing and enforcement while the case proceeds to its merits (or if and until the government seeks emergency relief). It may take a good deal of time before a final decision is reached and even then, other avenues may be pursued. Potential developments could include continued litigation regarding the constitutionality of the CTA, an executive order, the introduction of new policy guidelines, or even a compliance extension, similar to those granted to businesses affected by natural disasters.
3. Potential Impact of a Change in Administration: With Donald Trump elected to office and set to assume the presidency in January 2025, it is possible that his administration could influence how the Department of Justice (“DOJ”) handles any ongoing appeal. If Trump directs the DOJ to reconsider the appeal, the administration may choose to abandon or alter its approach, depending on their legal and political priorities. We note, however, that the DOJ typically defends the constitutionality of federal statutes regardless of administration.The new administration may also limit the enforcement of the CTA administratively, should it choose to prioritize deregulation, through executive action, review of FinCEN’s Reporting Rule, or issuance of policy guidance to narrow its application. This of course, would not eliminate the CTA obligations entirely, unless the CTA was permanently enjoined by the courts or otherwise repealed.  
4. Potential Legislative or Regulatory Changes: Whether in this administration or the next, dependent upon the composition of Congress, the law could change. Even if the CTA and the Reporting Rule are ultimately found to be unconstitutional, Congress or FinCEN could introduce efforts to amend the statute or regulations to address constitutional concerns, potentially reviving requirements in a modified form.
5. Impact on Information for Companies That Have Already Filed: For the companies that have already filed their BOI reports, the injunction does not require FinCEN to remove or disregard the information submitted. These companies remain in compliance for the time being, though they may be required to update their filings or resubmit reports if the legal landscape shifts. As of now, there are no instructions to delete or modify previously submitted data, but future developments could require companies to make adjustments or updates.

What Should Businesses Do Now?

In light of this decision, we recommend the following steps to ensure your business remains prepared for possible changes:

• Gather Beneficial Ownership Information: Businesses should continue their beneficial ownership analyses and continue collecting and safeguarding the information necessary to file BOI Reports with FinCEN to avoid last minute scrambling if the reporting requirements are reinstated.
• Monitor Developments: Stay informed about the progress of the Texas Top Cop Shop case, notices issued by the Treasury Department or FinCEN, and any related policy changes under a new administration. For updates regarding the CTA and reporting requirements, you can check FinCEN’s official news page at https://www.fincen.gov/news-room/news.
• Prepare Submissions: While you may choose to pause filings in light of this development, we recommend that you do not abandon preparations for eventual compliance. Continue to prepare for filing as originally planned with the information “file ready” by the original deadline so that you will be in a position to complete remaining filings on what may be a tight timeline. You may choose to withhold submission of that information to the FinCEN database until required to do so by resolution of the litigation or other Court or government mandate or you may choose to file as planned to avoid future uncertainty.

Why This Matters

Critics of the CTA note that the Texas federal court’s decision represents a significant defense of federalism, questioning the federal government’s role in regulating corporate entities, a task traditionally overseen by states. Supporters of the law note the CTA was designed to address global concerns about financial crimes like money laundering and terrorism financing. As the legal battle continues, businesses should anticipate potential shifts and be prepared to adapt.

1. Future of Federal Regulation: The Texas federal court’s decision raises significant questions about how much power the federal government should have when it comes to regulation of businesses. More broadly, this ruling could lead to challenges of other federal initiatives that intersect with areas traditionally controlled by states.
2. Compliance Uncertainty: Businesses should prepare for potential shifts in enforcement. Reporting obligations may resume, possibly with shorter deadlines, creating challenges for entities not adequately prepared.
3. Privacy and Data Security Concerns: Regardless of the CTA’s future, the requirement to collect and store sensitive beneficial ownership information highlights ongoing concerns about privacy and the security of corporate data. Businesses should evaluate their data protection practices to safeguard this information.

As of the time of this publication, FinCEN has not yet issued a statement with respect to its position on the Texas Court’s ruling. We expect FinCEN to issue a notice regarding these developments in the coming days.

If you have questions about how this injunction impacts your business or if you need assistance with compliance planning, please feel free to contact us at CTA@baileyglasser.com.