Business & Commercial LitigationTexas Federal Court Issues Nationwide Injunction Against the Enforcement of the Corporate Transparency Act – What Business Owners Should Know

01/10/2025by Thomas Fee

In a significant legal development, a federal court in Texas has issued a nationwide injunction halting the enforcement of the Corporate Transparency Act (CTA). This decision has sparked widespread discussion among business owners and legal professionals, as the CTA’s reporting requirements have been a topic of concern since its inception.

Here, our business and commercial litigation lawyers at Fee, Smith & Sharp LLP will explore the implications of this injunction, the legal reasoning behind the court’s decision, and what it means for businesses moving forward.

Background on the Corporate Transparency Act

 

The Corporate Transparency Act, enacted in 2021 as part of the National Defense Authorization Act, represents a substantial shift in corporate governance and anti-money laundering policies.

Its primary aim is to combat illicit activities such as money laundering and terrorism financing by requiring certain businesses to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN).

The CTA benefits individuals who either exercise substantial control over the company or own or control at least 25% of its ownership interests. This information must be reported to FinCEN and kept in a secure database accessible to law enforcement and other authorized entities. Noncompliance with these requirements can result in severe penalties, including significant fines and imprisonment.

The CTA has faced criticism, particularly from small businesses, due to the perceived undue burdens and privacy concerns it imposes. The recent injunction by the Texas federal court has highlighted these issues, temporarily halting the enforcement of the reporting requirements while the constitutionality of the law is being challenged.

The Texas Federal Court’s Injunction

 

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against enforcing the CTA’s reporting requirements, which business owners should be aware of. The case was brought by the National Small Business Association (NSBA), which challenged the CTA’s constitutionality.

The court’s decision was based on several key arguments:

  • Overreach and lack of Congressional oversight: The court found that the CTA’s requirements represented a significant overreach of federal authority, with inadequate safeguards to ensure accountability and transparency.
  • Privacy concerns: The court highlighted privacy concerns, noting the potential for misuse of beneficial ownership information despite assurances of confidentiality.
  • Economic burden on small businesses: The court acknowledged the economic burden on small businesses, recognizing that compliance with the CTA could disproportionately impact small businesses that may lack the resources to navigate complex reporting requirements.

Based on these findings, the court’s injunction prohibits FinCEN from enforcing the CTA until further notice, effectively pausing the law’s implementation nationwide.

Implications for Business Owners

 

The injunction on the CTA temporarily relieves business owners from the immediate obligation to report beneficial ownership information. However, this relief introduces several complex implications for businesses.

  • Compliance planning paused: Businesses prepared to comply with the CTA now face uncertainty about the law’s future. While the injunction lifts the immediate pressure to report beneficial ownership information, businesses must remain informed about legal developments and potential reinstatement of the law.
  • Legal and regulatory uncertainty: The injunction raises questions about the viability of the CTA in its current form. Should the law undergo significant amendments, businesses may need to adapt to revised compliance requirements. Legal counsel will be essential in navigating these changes.
  • Privacy and data security concerns: The court’s emphasis on privacy highlights these concerns. Businesses should proactively evaluate their data protection policies to mitigate potential risks even if the CTA’s reporting requirements are reinstated.
  • Focus on state-level requirements: While federal enforcement of the CTA is halted, some states have their own transparency laws. Business owners must ensure compliance with any applicable state-level regulations to avoid penalties. Businesses are not subject to liability for failing to report beneficial ownership information as long as the injunction remains in force, but they may continue to submit reports voluntarily.

In conclusion, the injunction provides temporary relief but introduces significant legal and regulatory uncertainty. Businesses should stay informed about legal developments, prepare for potential compliance requirements, and ensure they meet any state-level obligations to mitigate risks and avoid penalties.

What Is Next?

 

The nationwide injunction is not the final word on the CTA. The federal government is likely to appeal the decision, and higher courts, potentially including the U.S. Supreme Court, may weigh in on the law’s constitutionality. This legal journey could take months or even years to resolve, leaving businesses in limbo.

In the meantime, here are practical steps business owners can take:

  • Stay informed: Monitor updates on the CTA’s legal status and any related legislative developments. Partnering with our knowledgeable legal team can ensure you remain ahead of potential changes.
  • Conduct a beneficial ownership audit: Even though reporting is not currently required, understanding your company’s ownership structure can help you streamline compliance if the law is reinstated. This is particularly important for companies with complex ownership arrangements.
  • Evaluate data security practices: Strengthen your company’s data protection measures to safeguard sensitive information. This proactive approach can help mitigate risks, regardless of the CTA’s fate.
  • Engage in advocacy: Consider joining industry associations or advocacy groups to voice your concerns about the CTA. Collective action can influence legislative and regulatory outcomes.

These steps can help businesses navigate the uncertain legal landscape surrounding the CTA and prepare for any eventual outcomes. The Texas federal court’s injunction against the Act represents a pivotal moment in the ongoing debate over corporate governance and privacy. While the decision provides temporary relief for business owners, it also highlights the need for a balanced approach to transparency that considers regulatory objectives and the practical realities faced by small businesses.

Fee, Smith & Sharp LLP’s Business and Commercial Litigation Attorneys Can Help Your Business Remain Compliant

 

As this legal saga unfolds, businesses must remain vigilant and adaptable. By staying informed and proactive, business owners can navigate the complexities of this evolving regulatory landscape and safeguard their operations against future uncertainty.

For legal assistance or to discuss how this development affects your business, contact Fee, Smith & Sharp LLP. Our experienced business and litigation attorneys can guide you through the changing legal environment and help protect your interests.

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