As you may have read, on Tuesday, December 3rd, a federal district judge in Texas issued a nationwide preliminary injunction against enforcement of the Corporate Transparency Act (CTA) and its reporting requirements. Texas Top Cop Shop, Inc. v. Garland (Case No. 4:24cv478).The preliminary injunction stays all reporting obligations for all entities indefinitely.
It is likely—albeit not guaranteed—that the stay will remain in effect beyond the original January 1 reporting deadline for companies formed before 2024. The United States could appeal the decision to the federal Court of Appeals for the Fifth Circuit and seek a stay of the preliminary injunction on an emergency basis. In theory, the Fifth Circuit could act quickly and restore the reporting requirements and upcoming deadline for some or all reporting companies. In our view, it's more likely it will not.
Three other federal district courts have also made preliminary rulings on the CTA. An Alabama district court found the CTA unconstitutional but made its order binding only on the parties to the case. Two other courts found that the CTA would likely pass constitutional muster and therefore denied preliminary injunctions. The Alabama federal case has been appealed to the Eleventh Circuit, which held oral argument in late September. A ruling could be imminent.
Thus far, FinCEN (the Treasury Department agency charged with enforcing CTA) has been silent. And, whatever the current Administration decides to do in response to Tuesday's decision, the incoming Administration may do something different, including refusing to defend the CTA in court.
In short, it's impossible to offer anything definitive at this time. Nevertheless, in light of the current uncertainty, companies should consider the following:
- Companies that have been anticipating a January 1, 2025 deadline should now evaluate the complexity and current status of their reporting obligations. In particular, how quickly will they be able to resume their CTA filing procedures should beneficial owner reporting be reinstated?
- It is reasonable to adopt a wait-and-see approach so long as companies recognize that there is some risk that they may have to scramble to meet a short filing deadline in the future.
- Companies in the midst of obtaining beneficial ownership information and preparing to report by January 1 might reasonably opt to substantially finish the work involved, rather than risk having to start over. This could be done without actually reporting.
- Companies that have already advised their reporting persons to obtain FinCEN IDs may still encourage those individuals to complete their applications. From the reporting company's perspective, having FinCEN IDs for its beneficial owners lessens the ongoing compliance burden, and having them collected and ready in advance will simplify the restart of a filing process should the nationwide injunction be lifted.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
