On December 3, 2024, the U.S. District Court for the Eastern District of Texas (the “Court”), in Texas Top Cop Shop, Inc. v. Garland, issued a nationwide preliminary injunction temporarily enjoining the enforcement of the Corporate Transparency Act (“CTA”) and the corresponding Beneficial Ownership Information (“BOI”) reporting requirements. The BOI reporting requirements went into effect on January 1, 2024, and require most companies (referred to as “Reporting Companies”) to file a report with the Financial Crimes Enforcement Network (“FinCEN”) which requires, primarily, the disclosure of identifying information about the Reporting Company, its ultimate beneficial Owners, and those who exercise “substantial control” within the Reporting Company. To learn more about the CTA and BOI reporting requirements, please read our previous Client Alerts: The Corporate Transparency Act – New Reporting Requirements are on the Way and Corporate Transparency Act: Just the Facts.
The Court determined that the CTA and BOI reporting requirement are “likely unconstitutional,” and therefore determined the CTA and its BOI reporting requirements should be enjoined. Because the Court did not make a final judgment on the merits of the CTA’s constitutionality, the CTA remains the codified law of the land. Nevertheless, the preliminary injunction halts FinCEN’s enforcement of the BOI reporting requirements and accordingly the January 1, 2025, compliance deadline under the BOI reporting requirements is stayed until further notice or action is taken, as outlined herein.
The CTA requires those Reporting Companies that are created or registered to do business in the U.S. prior to January 1, 2024, to file their BOI Report with FinCEN by January 1, 2025. Reporting Companies that were created or registered to do business in the U.S. after January 1, 2024, but before January 1, 2025, are required to file their BOI Report within 90 days of formation or registration to do business in the U.S. Those formed or registered on or after January 1, 2025, must file the BOI Report within 30 days thereof.
What Happens Next?
The Court’s ruling in Texas Top Cop Shop, Inc. v. Garland has garnered substantial criticism, particularly that the Court’s nationwide injunction contravenes the bounds of its judicial authority. A challenge by the government is anticipated. A few possible results include:
- Appeal: The government may appeal the preliminary injunction. The appeal could potentially result in a stay of the injunction during the appellate process, in which case the BOI reporting obligations would immediately resume. The government has 60 days to appeal the injunction order.
- Final Court Decision: The Court may lift its stay as part of a final judgment on the merits of the case and the constitutionality of the CTA.
- Intervention: A higher federal court could intercede and nullify the injunction.
- Issue Guidance: FinCEN may issue a notice clarifying its continued enforcement of the CTA and BOI requirement despite the injunction.
- No Action: Given the imminent change to an administration that may be less partial to the CTA, enforcement of the BOI reporting requirements may be abandoned or neglected.
At the time of this Client Alert, no further official action has been taken.
What Does This Mean for Businesses?
This preliminary injunction introduces temporary uncertainty surrounding CTA and BOI compliance obligations. Businesses are encouraged to take note of the following:
- FinCEN is temporarily prohibited from taking any enforcement actions in connection with the BOI reporting requirements.
- While enforcement of the BOI reporting requirements is enjoined, the CTA is still officially in effect.
- This nationwide injunction does not impact any similar reporting obligations required under any state law.
While we anticipate that the government will challenge the Court’s decision, it is unlikely that a resolution will occur before December 31, 2024. Given the uncertainty and potential penalties resulting in failure to file, businesses should be prepared to file their BOI Report by the stated deadlines. To consult with an attorney about appropriate next steps for your business, please contact us immediately.
Leech Tishman is closely monitoring these injunction proceedings and related cases challenging the constitutionality and enforcement of the CTA and will update clients as new developments occur.