Big Win for Small Business: Court Blocks CTA Enforcement Nationwide
In a significant win for small businesses, and the Constitution, a federal court has issued a nationwide preliminary injunction halting enforcement of the Corporate Transparency Act (CTA) and its reporting requirements. The decision by the U.S. District Court for the Eastern District of Texas, issued December 3, 2024, pauses the CTA’s sweeping January 1, 2025, compliance deadline, sparing millions of businesses from the burden of filing beneficial ownership reports – at least for now.
What is the Corporate Transparency Act?
The CTA, enacted as part of the 2021 National Defense Authorization Act, requires millions of U.S. businesses to disclose detailed ownership information to the Financial Crimes Enforcement Network (FinCEN). The rule was designed to combat money laundering and terrorism financing, but it also imposed significant reporting obligations on small corporations and LLCs. Key requirements included disclosing:
Full legal names, dates of birth, and addresses of beneficial owners, and
Unique government identification numbers for each owner
Non-compliance threatens steep fines and criminal penalties, making this one of the most draconian reporting mandates for small businesses.
Court Halts Enforcement: Key Constitutional Concerns
The court found that the plaintiffs were likely to succeed in challenging the CTA and its reporting rule on constitutional grounds, leading to a stay of enforcement under the Administrative Procedure Act. Key constitutional issues raised by the court include:
Federal Overreach: The court ruled that the CTA violates Tenth Amendment principles, infringing on states’ rights to regulate businesses they create. Corporate governance has historically fallen under state law, and the CTA disrupts this balance with federal oversight.
First Amendment Violations: The court held that mandatory reporting of beneficial ownership information compels speech, potentially deterring individuals from associating with organizations due to privacy concerns.
Fourth Amendment Privacy Risks: The CTA’s requirement to disclose sensitive personal data about beneficial owners raised alarms about unwarranted government intrusion and insufficient protections against misuse.
The court also highlighted the immense financial burden of compliance, noting that FinCEN estimates projected first-year compliance costs at $22.7 billion, with $5.6 billion in annual costs thereafter.
What Does the Injunction Mean for Businesses?
The preliminary injunction blocks nationwide enforcement of the CTA and reporting rule, effectively pausing the January 1, 2025, compliance deadline. For now, businesses classified as “reporting companies” no longer need to submit ownership reports to FinCEN. This reprieve:
Eases financial and administrative burdens, especially for small businesses,
Allows companies more time to evaluate whether they fall under the CTA’s broad scope, and
Prevents immediate penalties for non-compliance, including civil fines and criminal liability.
What’s Next?
This injunction is temporary and subject to appeal. The government may decide to challenge the ruling, potentially taking the case to the Fifth Circuit or even the Supreme Court. However, it is unclear how the Department of Justice under the incoming Trump Administration will view the case. Businesses should remain prepared for the possibility that compliance obligations could return.
Key Considerations for Businesses
To stay ahead, businesses should take these proactive steps:
Stay Informed: Monitor developments in this case. The injunction could be lifted or overturned on appeal. Be ready for quick compliance if deadlines are reinstated.
Assess Your Status: Determine whether your business qualifies as a “reporting company” and identify what beneficial ownership information would need to be disclosed.
Streamline Processes: Prepare systems for collecting and verifying ownership data to ensure rapid compliance if the CTA takes effect.
Anticipate Broader Trends: Transparency and anti-money laundering initiatives are likely to remain a focus for regulators, even if the CTA’s requirements are ultimately blocked.
Why This Matters
This ruling offers at least a temporary lifeline for small businesses, but the Corporate Transparency Act and similar regulations remain a looming reality. Proactively aligning company practices with potential future transparency requirements can help mitigate risks and position companies for success in an ever-evolving regulatory landscape.
Read the court’s opinion and order here. For more information, contact Troy Garris at troy@garrishorn.com.