Federal Court Puts Corporate Transparency Act on Hold
By: Katherine A. Day, Esq. (kad@efclaw.com) and
Matti C. Tacy, Esq. (mct@efclaw.com)
Corporate Attorneys, Egan, Flanagan and Cohen, P.C.
On December 3, 2024, less than one month before the looming deadline for Reporting Companies to disclose beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”), the U.S. District Court for the Eastern District of Texas issued a nationwide injunction halting the enforcement of the Corporate Transparency Act (“CTA”) and its Reporting Rule. In his order on the Plaintiffs’ Motion for Preliminary Injunction, U.S. District Court Judge Amos L. Mazzant III enjoined the CTA, 31 U.S.C. § 5336, and enforcement of the Reporting Rule, 31 C.F.R. 1010.380, specifically stating that:
Neither 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.
The order has a wide-reaching effect due to Judge Mazzant’s determination that “the injunction should apply nationwide.” The case, Texas Top Cop Shop, Inc. v. Garland, U.S. Dist. Ct., No. 4:24-cv-00478 (E.D. Tex. Dec. 3, 2024), was filed by six plaintiffs – four small businesses, an individual beneficial owner, and the National Federation of Independent Business (“NFIB”), which has approximately 300,000 business members nationwide.
While the Texas court did not definitively hold the CTA unconstitutional, it weighed the likelihood of the Plaintiffs’ success in arguing its unconstitutionality by examining constitutional arguments from both the Plaintiffs and the Government. In determining the necessity for a nationwide injunction, Judge Mazzant opined it is likely that the Plaintiffs have a winning argument and the CTA would be found unconstitutional by another court.
The CTA and the Reporting Rule
Congress enacted the CTA as part of the William M. (Mac) Thornberry National Defense Administration Act for Fiscal Year 2021 (“NDAA”), with a stated goal of protecting national security interests by “enabl[ing] critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.” Pub. L. No. 116-283, div. F, 134 Stat. 4547, § 6402 (2021). Under the CTA, existing “reporting companies”, i.e., any “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 under the law of a State or Indian Tribe or formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe” are required to disclose their beneficial ownership information to the Treasury Department’s FinCEN by filing an online report by the January 1, 2025, deadline. Effective January 1, 2025, newly formed reporting companies are required to file their BOI reports within 30 days of formation.
In addition to the initial BOI Report, Reporting Companies are subject to a continuing obligation to file an updated BOI report if there is any change to the previously filed information or a corrected BOI report if the BOI report is inaccurate. Both the updated BOI report and corrected BOI report must be filed within 30 days after a change occurs or the Reporting Company becomes aware or has reason to know of an inaccuracy. Individuals who willfully disregard their BOI reporting obligations could face civil and criminal penalties.
What’s Next for Reporting Companies
As a result of the nationwide injunction, Reporting Companies that have not yet filed their BOI report with FinCEN need not comply with the CTA’s January 1, 2025, reporting deadline. Although the injunction bars FinCEN from enforcing the reporting rule and stayed the compliance deadline, Reporting Companies should still be prepared to act quickly to file their BOI report in the event the injunction is lifted, and reporting requirements are reinstated. A review of the injunction could happen in the coming weeks, prior to the original January 1, 2025, deadline.
In the event the injunction runs past January 1, 2025, Reporting Companies should continue to be prepared to comply quickly, as changes to the injunction may happen at any time through judicial or legislative action. It is especially important for newly formed companies to remain attentive to any changes in the law, as they may only have 30 days after formation to file a report if the injunction is lifted.
Egan, Flanagan and Cohen’s corporate team continues to follow these ongoing cases and remains ready to assist with any CTA questions. Nothing in this legal update should be construed as legal advice. However, if you have any questions regarding the CTA or your business’ obligations, you can contact our team directly by contacting Attorney Kate Day, Esq. at kad@ecflaw.com or Attorney Matti Tacy, Esq. at mct@efclaw.com or by calling (413) 737-0260.
