Staying Prepared
Federal Court Halts the Corporate Transparency Act
by Trent Cotney, Partner, Adams & Reese, LLP
(Editor’s Note: Trent Cotney, partner at Adams & Reese, LLP, is dedicated to representing the roofing and construction industries. Cotney is General Counsel for the Western States Roofing Contractors Association and several other industry associations. For more information, contact the author at (866) 303-5868 or go to www.adamsandreese.com.)
On December 3, 2024, a federal court in Texas issued a nationwide injunction temporarily blocking enforcement of the Corporate Transparency Act (CTA) and its related reporting requirement, which was set to take effect on January 1, 2025. This decision has significant implications for businesses across the United States, as it halts the requirement to disclose beneficial ownership details to the Financial Crimes Enforcement Network (FinCEN).
What Is the CTA?
The Corporate Transparency Act, passed in 2021, was designed to prevent various financial crimes, including money laundering and sanctions evasion. The law requires most businesses in the United States to disclose information about their beneficial owners: the individuals who have ownership or control of the company.
This information, which includes names, addresses, and identifying details, would be reported to FinCEN for use by law enforcement and other agencies. While the CTA aims to increase transparency in business ownership, it also introduced new compliance requirements for millions of businesses, particularly smaller companies and startups.
While national security experts, anti-corruption organizations, and other groups have heralded the law’s potential to restrict the ability of bad actors to hide illegal activity in their faceless LLCs, many critics see the CTA as invasive overreach. Those critics include a number of Republican lawmakers, in addition to real estate firms, local retailers, and trade groups that serve small businesses in industries such as farming and construction.
What Did the Court Decide?
After reviewing the case, which was put in motion by the National Federation of Independent Businesses and many of its members, Judge Amos Mazzant of the United States District Court for the Eastern District of Texas referred to the CTA as “quasi-Orwellian” and unconstitutional. He ruled that the CTA and its reporting mandate likely exceeded Congress’s constitutional authority and issued a preliminary injunction, halting enforcement of these requirements while the legal case proceeds. This action occurred just weeks before businesses were required to comply.
What Does This Mean for Businesses?
For now, businesses are not required to submit beneficial ownership information to FinCEN. This move offers a reprieve for companies that were preparing for the compliance deadline, particularly smaller businesses that may struggle to manage new reporting requirements.
However, businesses should proceed cautiously. The legal battle over the CTA is far from over, and future rulings or legislative actions could reinstate the requirements, possibly on short notice.
What to Expect Next
The ruling could likely land in the Fifth Circuit Court of Appeals, and the case might even reach the United States Supreme Court. Meanwhile, Congress and FinCEN may revisit the law to address the concerns raised by the court. In addition, as President Donald Trump’s administration retakes the White House in January, with a predominantly Republican Congress, support for the CTA may wane.
As the legal process unfolds, businesses should be prepared for potential changes. Although the January 1, 2025, compliance deadline is no longer enforceable, the situation could change quickly if the injunction is lifted or reversed.
If the CTA’s reporting requirements are reinstated, the civil and criminal penalties for noncompliance could be severe. Therefore, businesses must remain ready to act.
Final Advice
The court’s ruling on the Corporate Transparency Act provides businesses with a temporary break from the impending compliance requirements, but it’s not the end of the story. As the legal and legislative landscape evolves, companies must stay vigilant and prepared for potential shifts.
