The Uncertain Future of the Corporate Transparency Act
By: Brett A. Hodges
FEBRUARY 18, 2025 UPDATE:
On February 18, 2025, the U.S. District Court for the Eastern District of Texas granted FinCEN a stay order on its previously issued preliminary nationwide injunction on the enforcement of the Corporate Transparency Act (CTA). As a result, BOI reporting requirements are now mandatory.
The new year has brought forth new developments in the ever-changing saga that has been the implementation of the Corporate Transparency Act (CTA). Originally enacted in 2021, the CTA has long been a source of controversy amongst legal practitioners, small business owners, and politicians. With the January 1, 2025, reporting deadline already having come to pass, it remains important for business owners to be aware of how the CTA affects them and the recent legal challenges that have prevented full enforcement of the CTA’s mandates, and what to do going forward.
The Reporting Requirements of the CTA
The CTA requires “reporting companies” to provide information to the Financial Crimes Enforcement Network (FinCEN) regarding the “beneficial owners” of each reporting company. “Reporting companies” are very broadly defined to include any business entity that is created through the filing of a document with the state. This definition is broad enough to cover practically all business entities (e.g. LLCs, corporations, partnerships), but the CTA carves out a number of exceptions to this definition for businesses that are already highly regulated. For instance, banks, insurance companies, CPA firms, and “large operating companies” (defined as having more than 20 full time employees, a physical office within the United States, and more than $5,000,000 in gross receipts or sales) are exempt from reporting.
The definition of “beneficial owners” is likewise incredibly broad. Beneficial owners are defined as anybody who either (1) owns at least 25% of the reporting company, or (2) exercises “substantial control” over the reporting company. This definition includes everybody from passive investors to officers in the reporting company. Each individual meeting the definition of a “beneficial owner” must be reported to FinCEN. Failure to provide information on beneficial owners can result in penalties ranging from $500 to $10,000 per violation.
Enforcement and Legal Challenges
Several lawsuits have been commenced in courts across the country challenging the constitutionality of the CTA. One of the most notable of these cases is the case of Texas Top Cop Shop, Inc. v. Garland. In that case, the federal district court issued a preliminary injunction, halting enforcement until a higher court could rule on the constitutionality of the law. Although this case was successful in preventing enforcement of the January 1 reporting deadline, the United States Supreme Court on January 23 lifted the injunction that was preventing FinCEN from enforcing the CTA’s mandates.
Though this was a victory for the government, the Supreme Court’s decision is not the end of the story. Because the Supreme Court’s ruling was limited to the propriety of the nationwide injunction put in place by the trial court, the Plaintiff in Texas Top Cop Shop will still have the opportunity to argue the merits of the Constitutionality of the CTA. FinCEN has since released guidance stating that they will not be enforcing the CTA until other pending cases that are also filtering through the court system challenging the Constitutionality of the CTA have been resolved. However, because the prospect of enforcement is still present, it remains important for business owners to remain vigilant.
Dealing with the Uncertainty Surrounding the CTA
With the future of the CTA looking so uncertain, many companies are asking themselves, “What should we be doing about this?” As of the time of this writing, FinCEN is still accepting voluntary submissions of beneficial ownership information reports. This means that any company desiring to play it safe can voluntarily file a report disclosing their beneficial ownership information. However, many companies are rightfully concerned about privacy, and they do not wish to disclose any more information to the government than is strictly necessary. For those companies, waiting to file a report is allowed, but there is a certain amount of risk in waiting to file.
Though one would hope that FinCEN would delay enforcement until some reasonable amount of time after the litigation surrounding the CTA has been resolved, there is no guarantee that this will be the case. A failure to have CTA information ready at a moment’s notice could cause companies to miss their reporting deadlines, which would in turn subject them to massive penalties and potential criminal liability. It is therefore recommended to continue to voluntarily make the required filings under the CTA in anticipation of the CTA being ruled constitutional.
