On January 1, 2024, the federal Corporate Transparency Act (“the CTA”) went into effect mandating that “reporting companies,” which include most corporations and limited liability companies disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The law was challenged in multiple jurisdictions and found unconstitutional by one court in early 2024. Most recently, the United States District Court for the Eastern District of Texas issued a preliminary injunction in Texas Cop Shop, Inc, et al. v Garland, et al., NO. 4:24-cv-478 (December 3, 2024) temporarily halting enforcement of the law. This is important because businesses created prior to January 1, 2024, would have to file by January 1, 2025. In light of this new development, business owners should discuss the next steps with their attorneys.

Texas Cop Shop Case

The underlying action brought by the plaintiffs alleges that the CTA is unconstitutional as it is improper for a federal law to monitor companies organized and existing pursuant to state law. Further, the CTA ends one of the reasons that individuals form corporations, which is anonymity. The plaintiffs claim that the CTA intrudes upon States’ rights under the Ninth and Tenth Amendments of the Constitution, compels speech and burdens the plaintiffs’ right of association under the First Amendment, and violates the Fourth Amendment by compelling disclosure of private information. The plaintiffs sought a preliminary injunction to stop the law from being enforced while the case is pending.

The Court found that the Government’s arguments failed to reconcile the CTA with the Constitutional amendments referenced above. The Judge held that the CTA is likely unconstitutional, and the plaintiffs demonstrated they were likely to suffer irreparable harm as complying with the CTA would cause their First and Fourth Amendment rights under the Constitution to be violated if the Act was not enjoined. In deciding to issue the injunction, the Court stated that the threatened harm to the plaintiffs if the Act was not enjoined outweighed the benefits to the Government if the law was enforced. Further, the preliminary injunction would not harm the public. Thus, the injunction was justified.

Impact of the Injunction

Following the decision, FinCEN confirmed that reporting companies are not required to file beneficial ownership reports for as long as the injunction remains in effect, and reporting companies will face no consequences for failing to file. The reporting is now on a voluntary basis. 

If you would like to find out what this means for you or your company, please contact one of our trusted attorneys.