Dec. 16, 2024

This paid piece is sponsored by Woods, Fuller, Shultz & Smith PC.

A court ruling in Texas has put the brakes on a significant federal regulation of particular interest to business owners.

The Corporate Transparency Act has kept business owners across the country on their toes since its enactment earlier this year. With a nationwide injunction now in place, companies are temporarily relieved of the CTA’s looming reporting deadlines. However, this may not be the end of the story.

Whether you are a business owner, entrepreneur or simply intrigued by how law shapes the corporate world, the CTA continues to be one to watch. For background information on the CTA, please see here.

On Dec. 3, a federal district court in Texas issued a sweeping ruling that prohibits the federal government from enforcing the CTA anywhere in the United States. The court concluded that the CTA was likely unconstitutional.

In the court’s view, the act likely exceeded the federal government’s constitutional powers by imposing requirements based on a company’s mere existence — its “natural state of being” — rather than purporting to regulate any affirmative actions taken by the company. On that basis, the court entered an order that restricts the CTA and its associated regulations from being enforced at least while the Texas-based lawsuit is ongoing and specifically provides that companies subject to the act “need not comply with the CTA’s Jan. 1, 2025 … reporting deadline” until the court orders otherwise.

This ruling is not the first word on the CTA’s constitutionality.  Several other federal courts have been asked to address whether the act exceeds the federal government’s power — with mixed results. And a handful of other cases are pending in federal district or appellate courts. However, this is the first and only decision to have nationwide effect. Here, the court expressly concluded that a “nationwide injunction is appropriate,” thus preventing the government from enforcing the CTA against any companies anywhere in the country.

It is also not likely to be the last word. For starters, the court entered only a preliminary ruling. In theory, the court could revisit its preliminary decision somewhere down the line.

More pressingly, on Dec. 6, the federal government appealed the ruling to the U.S. Court of Appeals for the 5th Circuit. The 5th Circuit will review the district court’s ruling. It ultimately could choose to affirm the district court’s decision and leave the injunction in place, to dissolve the injunction — effectively restoring the obligations imposed by the CTA pending the lawsuit — or to modify the injunction in some way. The schedule for that appeal has yet to be determined, but it is likely that the 5th Circuit will hear arguments and issue a decision sometime next year.

Moreover, even if the 5th Circuit agrees with the district court that the CTA is likely unconstitutional, the government would have the option to seek appellate review again — this time by the U.S. Supreme Court. Thus, it remains to be seen whether reporting companies will be permanently relieved.

The upshot, however, is that unless and until one of these courts modifies the injunction or the decision is overturned on appeal, all reporting entities are relieved — at least temporarily — of their obligations to file beneficial owner reports before the deadline. FinCEN, the agency tasked with the CTA, has since acknowledged as much:  It has announced that “in light of the injunction, 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,” even as companies may continue to voluntarily submit these reports if they so choose.

At this time, FinCEN has not indicated whether it will provide additional time for filing reports if the injunction is stayed or lifted. And it is unclear whether a court inclined to uphold the CTA would issue any similar relief. As such, prudent business owners should continue to keep an eye on CTA-related news, and they may wish to continue assembling the information necessary to complete their reports in case the preliminary injunction is lifted and the report-filing obligation is reimposed on short notice.

Woods Fuller is continuing to monitor updates to the CTA and the litigation surrounding it.