In a groundbreaking decision, the U.S. District Court for the Eastern District of Texas has issued a preliminary injunction temporarily halting the enforcement of the Corporate Transparency Act (CTA). This ruling has significant implications for millions of businesses across the United States that are subject to the CTA’s Beneficial Ownership Information (BOI) reporting requirements.
What is the Corporate Transparency Act (CTA)?
The CTA, enacted in 2021 as part of the Anti-Money Laundering Act, requires corporations, LLCs, and similar entities to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). The law aims to increase transparency in corporate ownership to combat financial crimes such as money laundering and terrorism financing.
Under the CTA, businesses deemed "reporting companies" must file detailed information about their beneficial owners, including:
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Full legal names.
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Dates of birth.
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Current residential or business addresses.
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Unique identification numbers from accepted forms of identification.
Failure to comply can result in severe civil and criminal penalties, including fines up to $10,000 and imprisonment for up to two years.
The Court’s Ruling
The court’s preliminary injunction pauses enforcement of the CTA nationwide, citing several constitutional concerns:
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Overreach of Federal Authority: The CTA encroaches on areas historically regulated by state law, violating principles of federalism.
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Privacy Concerns: The requirement to disclose sensitive personal information raises privacy and Fourth Amendment concerns.
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Burden on Small Businesses: The court acknowledged the disproportionate impact on small and medium-sized enterprises, which face significant compliance costs.
This ruling does not invalidate the CTA but prevents its enforcement while the case is under judicial review.
What Should LLCs and Reporting Companies Do Now?
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Pause Filing Requirements: LLCs and other businesses classified as “reporting companies” under the CTA are not currently required to submit BOI reports to FinCEN. Businesses should hold off on filing until further legal clarity is provided.
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Stay Informed: Monitor developments closely. The government is expected to appeal this decision, which could lead to the injunction being lifted or modified.
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Prepare for Potential Compliance: While the injunction is in place, companies should remain prepared for potential compliance requirements. Consider identifying beneficial owners and gathering necessary documentation in case the law is reinstated.
What’s Next?
The federal government has indicated its intent to appeal the injunction to the Eleventh Circuit Court of Appeals. If the appellate court overturns the ruling, enforcement of the CTA could resume. Ultimately, this case may reach the U.S. Supreme Court for a final determination on the law’s constitutionality.
Conclusion
For now, businesses subject to the CTA can breathe a temporary sigh of relief. However, the legal battle over the Act’s implementation and constitutionality is far from over. Businesses should remain vigilant and proactive, ensuring they are prepared to comply if and when the CTA is reinstated.
For further information or personalized guidance, please contact the legal team at DeHeng Chen LLC. We are closely monitoring this case and are here to assist with any questions or concerns.
