Enforcement of Beneficial Ownership Information Reporting Under the Corporate Transparency Act Temporarily Blocked

On Dec. 3, 2024, a District Court in Texas placed a preliminary nationwide injunction on new Beneficial Ownership Information (BOI) reporting requirements imposed by the Corporate Transparency Act (CTA). In Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478 (E.D. Texas) the judge ruled that “[a] nationwide injunction is appropriate in this case,” which means that “reporting companies need not comply with the CTA’s Jan. 1, 2025, BOI reporting deadline pending further order of the Court.” Although BOI reporting obligations are outside the purview of services that CBIZ is authorized to provide, we understand this news is important to many of our clients.

Background

Congress enacted the CTA on Jan. 1, 2021, as part of the 2021 National Defense Authorization Act. Since Jan. 1, 2024, many types of companies (unless specifically exempted) must file new information about company ownership with the Financial Crimes Enforcement Network (FinCEN). Generally, this impacts some C corporations, S corporations, limited liability companies, partnerships and any type of state-law entity that is required to file a report with the relevant state’s Secretary of State or similar office.

Filers generally must report the identity of their owners upon the formation of the company and on every occasion that such information changes. Impacted companies existing prior to Jan. 1, 2024, have until Jan. 1, 2025, to file initial reports. New companies created during 2024 have 90 days to file, new companies created after 2024 have 30 days to file, and companies with ownership changes have 30 days to update their information.

It is estimated that the CTA required approximately 32.6 million existing business entities to file a report which discloses information about their beneficial owners to FinCEN by Jan. 1, 2025.

Preliminary Nationwide Injunction

In explaining the Court’s view that the CTA created an unlawful federal monitoring system for companies that were granted anonymity under state law, the Court noted that “the CTA appears likely unconstitutional.” The Court added, “despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power.”

Furthermore, in distinguishing Congress’s regulatory power under the Commerce Clause of the U.S. Constitution, the Court observed that the CTA attempts to regulate impacted companies without regard to any actual engagement in commercial activities. “The fact that a company is a company does not knight Congress with some supreme power to regulate them in all respects – especially through the CTA, which does not facially regulate commerce,” the Court said.

Because one of the six plaintiffs in the case had over 300,000 members, the government pleaded that any enforcement injunction benefitting those members would have the practical effect of a nationwide injunction. The Court was not dissuaded by that warning and held that “the extent of the constitutional violation Plaintiffs have shown is best served through a nationwide injunction.”

Other Ongoing Litigation

Earlier this year, a District Court in Alabama also held that the BOI reporting requirements under the CTA were unconstitutional, but that Court’s order enjoined the government from enforcing the reporting requirements against the Plaintiffs only. In response to that Court’s orders, FinCEN announced on March 4 that it would cease enforcement against the Plaintiffs of that case, but that it would continue to implement the CTA and subject all other impacted companies to the BOI reporting requirements.

Unlike this earlier ruling (which presently is on appeal in the Eleventh Circuit), the Court’s ruling in Texas Top Cop Shop, Inc. v. Garland imposes a nationwide injunction.

Meanwhile, other Courts sided with the government earlier this year in denying Plaintiff motions for injunctions and declaratory relief (Community Associations Institute v. Yellen; Firestone v. Yellen).

Takeaway

As noted previously, BOI reporting obligations are outside the purview of services that CBIZ is authorized to provide. This article is not intended to provide any legal advice, and as a result, we encourage you to contact your legal counsel to ascertain whether your company would be subject to BOI reporting obligations, and how this preliminary nationwide injunction affects your company. External legal commenters have observed that the nature of the Court’s preliminary injunction could mean that the Court may later reconsider that injunction, and that the government is likely to appeal the Court’s decision. Additionally, they note that the inconsistent rulings among the District Courts may mean that the ruling in Texas Top Cop Shop, Inc. v. Garland may not be the final word on the matter. They also question whether the court has the authority to issue a nationwide injunction. And for what it’s worth, the FinCEN website does not yet mention this case and appears to continue accepting BOIR filings.

Your legal counsel can review those perspectives with you in helping you to decide how and when you should respond to the BOI reporting obligations. We understand that most attorneys are advising clients to be prepared to file but not to complete the filing until more information is known about the impact of this case.

If we can provide further clarification to you on these matters, please connect with us.