A federal district court in Texas has issued a preliminary injunction preventing the federal government from enforcing the Corporate Transparency Act (CTA) and related Beneficial Ownership Information (BOI) reporting provisions. The injunction, which the court says applies nationwide, delays the January 1, 2025, BOI reporting deadline for covered entities pending further action.
The court issued this ruling in the Texas Top Cop Shop, Inc. v. Garland case declared that the CTA likely exceeds Congress’s constitutional powers. Though the U.S. Department of Justice has already filed an appeal, experts advise businesses to remain vigilant and prepared to comply with any potential future rulings.
What Does the Injunction Mean for BOI reporting?
The court’s decision momentarily halts the need for entities to comply with BOI reporting requirements of the CTA. But experts stress that this could just be a momentary pause. Companies may now get extra time to gather paperwork and adapt to the requirements.
However, experts say that businesses should not consider this an all-out cancellation and should still be prepared in case the injunction is removed. Experts suggest businesses begin gathering necessary information about beneficial owners and be ready to file reports as soon as the legal situation changes.
Constitutional Concerns?
When issuing the injunction, the court described the CTA as “quasi-Orwellian,” suggesting that the legislation oversteps congressional authority. Specifically, it argued that the CTA is a law enforcement tool rather than an instrument calibrated to protect commerce, making it incompatible with the Commerce Clause of the U.S. Constitution, under which the government said Congress had the power to enact the CTA.
The government had argued that Congress could also enforce the CTA under the Necessary and Proper Clause of the U.S. Constitution. But the court did not agree and held that that clause does not empower Congress to regulate strictly domestic issues such as the ownership of companies operating in the U.S. The court pointed out that this has no intrinsic relation to either foreign affairs or national security.
Though the government defended the CTA as necessary in trying to combat money laundering and associated crimes through BOI reporting, the court felt otherwise.
Nationwide Implications
The nationwide injunction issued by the court means that all major reporting companies in the United States do not have to comply with the BOI reporting deadline as long as the case remains sub judice.
Some have welcomed this, saying this will protect small businesses from the serious punishments – civil penalties of up to $500 per day and criminal penalties including a $10,000 fine and/or two years of imprisonment. Any business formed before January 1, 2024 that failed to file their initial BOI reports before January 1, 2025 would have faced these penalties.
Some others though worry that this case has caused confusion about the future of BOI and has left many unclear about what to do next and how to move forward.
Background on the CTA
As its name suggests, the Corporate Transparency Act (CTA) is a regulation that is aimed at increasing corporate transparency in the U.S. Also holding the aim to prevent money laundering and other financial crimes, the CTA requires companies to report all information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) through BOI reporting. This requirement applies to millions of companies, regardless of size or turnover.
Conclusion: What Next?
An appeal by the DOJ can take the matter to the higher courts. Professionals, on their part, advise enterprises to keep informed about the case and understand the changes it may bring on their compliance obligations.
The nationwide injunction halting BOI reporting reflects the complexities of balancing transparency with regulatory fairness. Businesses should use this pause to assess their compliance strategies while staying alert to updates from the courts and FinCEN.