Contact us

Insights & Resources

•

Court Suspends Beneficial Ownership Reporting: What the Texas Ruling Means for Businesses 

Filed under

    Initial beneficial ownership reports required under the Corporate Transparency Act (CTA) that were due by January 1, 2025 have now been suspended under a nationwide injunction issued on December 4, 2024 by a U.S. District Court in Texas. In Texas Top Cop Shop, Inc., et al v. Garland, the Court found the requirement for state-registered entities to report beneficial owners to the federal government was “likely unconstitutional as outside of Congress’s power” and “must be enjoined.” Unlike other courts that have considered the reporting requirement, the Texas court’s injunction applies nationwide, so an estimated 32 million reporting companies do not need to comply with the beneficial ownership information (BOI) reporting deadlines pending further order of the Court. 

    Even before the Texas court order, members of Congress and the AICPA had been urging FinCEN to delay the filing date for BOI reporting for at least one year. AICPA told FinCEN, “The [deadline] for most existing small businesses must be delayed or this country will see millions of small business owners become accidentally and unknowingly delinquent in their compliance.” The group noted there is a “worrisome lack of awareness” of the requirements, and the deadlines and filing complexity would be extremely burdensome for entities and their advisers.  

    Basics of BOI Reporting

    As the Texas court states, “…The CTA regulates companies that are registered to do business under a state’s laws and requires those companies to report their ownership, including detailed, personal information about their owners, to the Federal Government on pain of severe penalties.” 

    For a deeper understanding of filing a BOI Report, deadlines and penalties, please refer to our previous article on complying with the CTA. 

    Courts Are Split… What Happens Now?

    At least four federal courts are considering the constitutionality of the Corporate Transparency Act and beneficial reporting. Courts in the Eastern District of Virginia and in the District of Oregon failed to issue an injunction halting enforcement but are still considering its legitimacy.  

    An Alabama federal court ruled that the CTA violates the Constitution’s Commerce clause. In National Small Business United v. Yellen, the Court enjoined the Treasury Department and FinCEN from enforcing the Act. However, the injunction only applies to the plaintiffs in the case–members of the National Small Business Association (NSBA) as of March 1, 2024.  

    Now with the Texas case and the nationwide injunction, there is a split in the Circuits on whether the law may be unconstitutional and whether the reporting should be enforceable pending final decision by the courts. The Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal in the Texas Top Cop Shop, Inc. case on December 5, 2024. FinCEN commented, “The government continues to believe—consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon—that the CTA is constitutional.” 

    Note: All of these deadlines are suspended for now under the Texas court’s ruling.  

    FinCEN has issued a statement explaining that, while the litigation is ongoing, it will comply with the Texas court order as long as it remains in effect. The post goes on to say “…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.” 

    Meanwhile, entities can still begin preparing their reports in case the stay is lifted, or they can go ahead and file on the FinCEN website. However, it is not unreasonable to wait and see what happens before investing time and money in preparing reports. This decision is an important one and should be discussed with your financial advisor or legal counsel. Frazier & Deeter stands ready to help you with these important choices. 

    Explore related insights

    Explore Insights & Resources