Injunction Halts Enforcement Beneficial Ownership Information (BOI) Reporting

ARTICLE | December 05, 2024

On December 3, 2024, the US District Court for the Eastern District of Texas issued a preliminary injunction suspending (temporarily) enforcement of the Corporate Transparency Act (CTA) and its implementing regulations nationwide, concluding that the CTA is likely unconstitutional as it is outside Congress’s power. This was not the first court to reach such a conclusion. However, the relief provided by the court applies nationwide rather than to the specific plaintiffs.

The CTA would have imposed new information reporting requirements on businesses across the United States. The CTA, enacted to discourage illicit economic activity, mandated U.S. registered entities to disclose their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a department of the U.S. Treasury.

The CTA was set to become effective on January 1, 2025, necessitating an estimated 32.6 million existing businesses to report their BOI. The court’s injunction, granted on December 3, 2024, has provided temporary relief to these companies, many of which were in the process of gathering the necessary documentation for this new filing.

The injunction resulted from a lawsuit filed by a family-run firearms retailer, Texas Top Cop Shop Inc., among other co-plaintiffs. The plaintiffs argued that the CTA exceeded Congress’s powers to regulate interstate and foreign commerce as it imposed regulations on incorporated entities irrespective of their engagement in commercial activity.

The court concurred, stating that the Constitution’s Commerce Clause could not be leveraged to compel the disclosure of information for law enforcement purposes. The judge, Amos L. Mazzant III, noted that “the fact that a company is a company does not knight Congress with some supreme power to regulate them in all aspects.”

Despite the injunction, it is important to note that this preliminary ruling does not definitively decide the constitutionality of the CTA. It merely indicates that the plaintiffs are likely to succeed in their challenge, and hence the enforcement of the Act should be halted while the court challenge is pending. A final decision on the CTA’s constitutionality will come in later proceedings. In the meantime, the injunction may be appealed by the U.S. Department of Justice, leading to a potential stay, or narrowing of the injunction.

For businesses, this development introduces a level of uncertainty. While the ruling may tempt some to pause their preparations for compliance, it is recommended that preparations are not abandoned altogether. If an appeal is filed and the injunction is stayed or narrowed, businesses should be ready to complete their filings on what could become a tight timeline.

In conclusion, while the injunction provides temporary relief from the CTA’s BOI reporting requirements, the legal path ahead remains fluid. Businesses are advised to monitor developments closely and to be prepared for potential changes to the compliance landscape.