What this is: On December 3, 2024, the United States District Court for the Eastern District of Texas (the district court) issued an Order granting a nationwide preliminary injunction precluding the Financial Crimes Enforcement Network (FinCEN) from enforcing the Beneficial Ownership Information (BOI) reporting requirements of the Corporate Transparency Act (CTA).
What this means: Texas Top Cop Shop, Inc. v. Garland, 2024 U.S. Dist. Lexis 218924 (E.D. Tx. Dec. 3, 2024) was brought by a group of plaintiffs contesting the constitutionality of the CTA and seeking a court order preventing its enforcement. This is one of several federal district court cases challenging the CTA, but the only one where a nationwide preliminary injunction has been issued.
The plaintiffs in Texas Top Cop Shop contend that the CTA and its implementing regulations violate portions of the First, Fourth, Ninth and Tenth Amendments of the US Constitution. In response, the defendants, FinCEN and other US government entities (collectively, “the government”), maintain that the Commerce Clause and the Necessary and Proper Clause of the US Constitution authorize the CTA.
The district court did not rule on the CTA’s constitutionality. Rather, it issued its Order granting the preliminary injunction, stating that “the CTA is likely unconstitutional as outside of Congress’s power” and indicated that the plaintiffs had met their burden for a preliminary injunction by showing, among other things, that they will incur irreparable harm if the court does not stop FinCEN from enforcing the CTA while the CTA’s constitutionality is being decided in the courts.
The government has appealed the Order with the US Court of Appeals for the Fifth Circuit.
In response to the district court’s Order and until further notice, FinCEN is currently not enforcing the CTA’s beneficial ownership reporting requirements, but it is still accepting BOI reports that are submitted voluntarily.
FinCEN states the following on its website:
“In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.” (Emphasis added.)
“Texas Top Cop Shop is only one of several cases in which plaintiffs have challenged the CTA that are pending before courts around the country. Several district courts have denied requests to enjoin the CTA, ruling in favor of the Department of the Treasury. The government continues to believe—consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon—that the CTA is constitutional.”
FinCEN estimated that approximately 32 million companies are subject to the CTA’s BOI reporting requirements. To date, it has received over 10 million BOI reports. FinCEN was expecting several thousand or millions more in the next few weeks as the January 1, 2025 filing deadline for pre-existing reporting companies approached.
Due to the district court’s nationwide preliminary injunction, no reporting company is currently required to file a BOI report, despite the reporting deadlines imposed by the CTA and its implementing regulations. FinCEN has stated that reporting companies will not be subject to penalties for failure to file while the preliminary injunction remains in force.
It is unclear how long the preliminary injunction will remain in force and whether the courts will ultimately uphold the CTA or strike it down as unconstitutional. It is likely that the government will ask the Fifth Circuit Court of Appeals to stay the district court’s preliminary injunction while the appeal is being decided. If the Fifth Circuit stays the preliminary injunction, mandatory BOI reporting could return as soon as sometime this month.
While it is currently not mandatory for reporting companies to file BOI reports, some non-exempt reporting companies are voluntarily filing their BOI reports now to have it “out of the way,” as they are assuming that the injunction will be lifted at some point.
Other reporting companies are holding off on filing their BOI reports while the injunction is in force and adopting a wait-and-see approach.
Non-exempt reporting companies that have not yet filed BOI reports should discuss with their counsel whether to file their BOI reports voluntarily now or to wait. For those that decide to hold off, many attorneys are suggesting that reporting companies gather the required information now so that they are prepared to file if/when BOI reporting becomes mandatory again.
So far, there has been a split in the federal district courts on the constitutionality of the CTA. Three of the federal district court cases are on appeal: Two where the government is appealing district court decisions in favor of plaintiffs and one where the plaintiff is appealing a district court decision in favor of the government. It is possible that there will be a split in the appellate courts as well and the US Supreme Court could ultimately be deciding the CTA’s constitutionality.
As of now, the CTA’s future is uncertain. As we saw last week when the district court issued its nationwide preliminary injunction, circumstances are in flux and can change quickly. Thus, it is essential for non-exempt reporting companies to keep a close watch on the CTA’s status, consider consulting with counsel and make decisions on whether to submit BOI reports voluntarily or to hold off. For those reporting companies that choose to hold off, it may be prudent to start gathering the information now to be ready to file in case of a rapid change in the CTA’s enforcement status.
On December 22, 2023, New York Governor Kathy Hochul signed S.995B/A.3484, the LLC Transparency Act (“the Act”), into law. The Act was amended on March 1, 2024 and takes effect on January 1, 2026. The Act requires both domestic and foreign qualified LLCs to file a Beneficial Ownership Information (BOI) report with the New York DOS disclosing the names of each LLC’s “beneficial owners” and other information. Reporting deadlines vary. The DOS will store the BOI in a non-public database available to law enforcement and other government agencies under certain circumstances. The Act’s definition of “beneficial owners” and some other key terms mirrors the language of the federal Corporate Transparency Act and its implementing regulations (collectively, the “CTA”). To learn more, read our article, New York’s LLC Transparency Act: Key Details and Comparisons to the CTA.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.