Update: Corporate Transparency Act Reinstated; Filing Deadline Extended

Corporate Transparency Act Reinstated; Filing Deadline Extended

Brownstein Client UPDATE, Dec. 24, 2024

The Firth Circuit Court of Appeals on Dec. 23, 2024, lifted the nationwide injunction that had prohibited the Treasury Department from enforcing the Corporate Transparency Act (CTA), including the Dec. 31 deadline for companies to report identifying information about their owners.  With only a week remaining before the original deadline, the Treasury Department announced that the filing deadline will generally be extended to Jan. 13, 2025.  The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announcement and exceptions for certain cases is available here.  Companies originally required to report this year should contact their legal advisors as soon as possible.

Corporate Transparency Act Remains Suspended after DOJ Motion Denied

Brownstein Client UPDATE, Dec. 20, 2024

Following the initial ruling by the U.S. District Court for the Eastern District of Texas on Dec. 3, 2024, imposing a nationwide preliminary injunction on the enforcement of the Corporate Transparency Act (CTA), the Department of Justice appealed and filed an emergency motion to stay the injunction.  On Dec. 17, the District Court denied the government’s motion to lift the injunction while the appeal to the Fifth Circuit moves forward.

The DOJ has also asked the Fifth Circuit for an emergency stay to the injunction.  However, the court has yet to rule on that request.  As a result, the injunction continues to prohibit the Treasury Department from enforcing from CTA rules, including the Dec. 31 deadline for companies to report identifying information about their owners.

Preliminary Injunction Prohibits Enforcement of Corporate Transparency Act

Brownstein Client Alert, Dec. 9, 2024

On Dec. 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction prohibiting the Treasury Department from enforcing the Corporate Transparency Act (the “Act”). The ruling in Texas Top Cop Shop v. Garland et al. (case 4:24-cv-00478) (the “Case”) comes just weeks before the Jan. 1, 2025, deadline requiring companies to report identifying information about their owners (the “Reporting Requirement”) and includes a stay of the deadline. This decision is one of several legal challenges to the Act. Notably, the ruling in this Case broadens a previous 11th Circuit decision from March 2024, which issued a permanent injunction against enforcement of the Act as applied to the National Small Business Association (NSBA). Unlike the 11th Circuit’s narrower ruling, which found the Act unconstitutional only as applied to the NSBA (and its constituent members), the Texas court determined the Act is likely facially unconstitutional and enjoined its enforcement nationwide pending a final decision on the merits.

The Act, passed in 2021, imposed new disclosure requirements on companies formed under state laws. It applies to nearly all domestic entities and foreign entities registered to do business in any state (“Reporting Companies”), subject to certain exemptions. The Act mandates that any Reporting Companies formed before Jan. 1, 2024, submit beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN) by Jan. 1, 2025. Additionally, entities formed after Jan. 1, 2024, are required to submit BOI within 30 days after the date of their formation (extended to 90 days for entities formed prior to Jan. 1, 2025). Under the Act, BOI must be provided for individuals who either exercise “substantial control” over the entity or own or control at least 25% of the entity’s ownership interests. The Act also imposes ongoing obligations to update BOI when changes occur. Penalties for noncompliance include civil fines of up to $500 per day and criminal penalties of up to $10,000 and two years of imprisonment.

The Case was brought by six plaintiffs, including the National Federation of Independent Business ((NFIB) (collectively, the “Plaintiffs”). The Plaintiffs challenged the Act as unconstitutional both facially and as applied, arguing that it violated state sovereignty under the Ninth and Tenth Amendments, freedom of speech and association under the First Amendment and privacy rights under the Fourth Amendment. In granting the preliminary injunction, the court focused solely on the Act’s facial constitutionality with respect to the Ninth and Tenth Amendment challenges, concluding there was a substantial likelihood that the Act exceeded Congress’s constitutional authority and infringed on state sovereignty.

In deciding whether to grant the Plaintiffs’ request for a preliminary injunction, the court weighed the balance of equities between the Plaintiffs’ interests and the government’s interest in enforcing the Act. The court determined that the threat of injury to the Plaintiffs outweighed any potential harm to the government from the injunction.

The court notably departed from and expanded upon the 11th Circuit’s earlier ruling by granting the injunction on a nationwide basis rather than limiting it to the Plaintiffs. The government argued that including the NFIB, with its more than 300,000 members, as a Plaintiff in the case would effectively result in nationwide relief, even if the injunction were technically limited. The court agreed but went further, reasoning that because the Act applies to approximately 32.6 million existing companies nationwide and likely presents widespread constitutional violations, the injunction should explicitly apply nationwide. Additionally, the court determined that staying the Reporting Requirement’s compliance deadline on a nationwide basis was appropriate, given that the injunction against enforcement also applied nationwide.

The court also stayed the Jan. 1, 2025, compliance deadline under the Act pending further order from the court. Notably, the court did not address any deadlines for reporting newly formed entities. On Dec. 5, 2024, the Department of Justice (on behalf of the Department of the Treasury) filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit. FinCEN also released a statement noting that “reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect”. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.

While the court’s ruling temporarily halts enforcement of the Act and stays the reporting deadline for certain existing entities, it did not decide on the merits the issue of the Act’s constitutionality. Although the compliance deadline for Reporting Companies formed prior to Jan. 1, 2024, is stayed and the Treasury Department is enjoined from enforcing the Act, the court’s order did not stay any reporting deadline for newly formed entities. Additionally, there can be no assurances that any final disposition of the matter will confirm that the Act is unconstitutional. As a result, companies may risk breaching representations and warranties related to compliance with laws if they do not file BOI reports for newly formed entities.

Even if the Act is repealed or the preliminary injunction becomes permanent, states are already moving forward with their own transparency laws. In March 2024, New York passed the New York Limited Liability Transparency Act (NY LTA), effective Jan. 1, 2026, requiring LLCs to disclose beneficial ownership or attest to exempt status. Under the NY LTA, companies formed prior to its effective date have until Jan. 1, 2027, to make their reports. California’s Senate passed a similar measure in May 2024 (S.B. 1201), and Maryland and Massachusetts have proposed their own versions. While state requirements differ from the Act and from one another, a clear trend is emerging, with states prepared to legislate transparency independently of federal efforts. Given the court’s focus in this case on state sovereignty under the Tenth Amendment, these state-level laws could withstand constitutional scrutiny. Unless future rulings address First or Fourth Amendment challenges to the Act, compliance with state transparency laws is likely to be required.

THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING THE CORPORATE TRANSPARENCY ACT. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS. THE INFORMATION IN THIS ARTICLE IS ACCURATE AS OF THE PUBLICATION DATE. BECAUSE THE LAW IN THIS AREA IS CHANGING RAPIDLY, AND INSIGHTS ARE NOT AUTOMATICALLY UPDATED, CONTINUED ACCURACY CANNOT BE GUARANTEED.

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