Texas Court Hits Pause on the Corporate Transparency Act: What It Means for Your Business

If you’re a fan of your privacy and you own a business, you may be thinking to yourself, “God Bless Texas” at the moment.

In an order in Texas Top Cop Shop, Inc., et al v. Merrick Garland, Attorney General of the United States, et al, Judge Mazzant of the United States District Court for the Eastern District of Texas recently issued a preliminary injunction halting the enforcement of the Corporate Transparency Act (“CTA”). Put another way, no need to file your Beneficial Owner (“BOI”) reports, at least for now while this temporary pause is in effect. 

A quick refresher: the CTA, enacted in 2021 and taking effect on January 1, 2024, mandated that most corporations and limited liability companies registered to do business in the United States submit BOI reports to the Financial Crimes Enforcement Network (“FinCEN”). The Court pointed out that roughly 32.6 million businesses across the country are impact by the CTA. Congress’s stated purpose of this exercise was to assist law enforcement in the fight against money laundering, terrorism financing, and other illicit activities by increasing transparency in corporate structures. What was not contemplated thoroughly enough, according to the Court, was the constitutionality of this congressional act and its economic impact on small businesses and their owners.

Our protagonists in this story are a group of small businesses and an individual. They argued that the CTA violated constitutional protections, including the First, Fourth, Ninth, and Tenth Amendments, and placed an undue regulatory burden on entities with limited resources.

The Court agreed, emphasizing the following points:

1. Compliance Costs: The CTA would impose significant financial and administrative burdens on millions of businesses, particularly small entities. Ironically, given the Government’s defense of this allegation, FinCEN’s own estimates suggested compliance costs could reach $21.7 billion in the first year alone, with smaller businesses bearing the brunt.
2. Constitutional Concerns: The Government insisted that the Commerce Clause and the Necessary and Proper Clause of the Constitution provided the authority necessary to Congress to pass this type of legislation, but the Court disagreed. As to the Commerce Clause, the Court found that the CTA does not regulate channels of, or instrumentalities in, commerce. In an analysis that made me chuckle, the Court observed that the CTA doesn’t regulate an activity, it creates one, namely reporting every new company that is created. The Court found the plaintiffs were likely to succeed on claims that the CTA exceeded Congress’s legislative authority and infringed on rights such as privacy and freedom of association. As to the Necessary and Proper Clause, the Court analyzed Congress’ powers to regulate commerce, regulate foreign affairs, and to lay and collect taxes. All three arguments were found wanting and the Court ultimately determined that acts of Congress supported by the Necessary and Proper Clause must be “narrow in scope” or “incidental to an enumerated power”, neither of which were the case here.  
3. Irreparable Harm: The Court concluded that the compliance burdens and constitutional violations constituted irreparable harm, justifying the injunction.

For businesses subject to the CTA, the ruling provides immediate relief. Without the injunction, those companies created before January 1, 2024 would have faced deadlines to report BOI by January 1, 2025, with stiff fines and potential criminal liability for noncompliance.

This decision also addresses concerns about the broader implications of the CTA:

• Privacy Issues: Many small business owners were worried about the exposure of personal information, which could create vulnerabilities such as identity theft or misuse by unauthorized entities.
• Administrative Burdens: For businesses with limited staff and resources, compliance would have required hiring legal or financial professionals, increasing operational costs.
• Federal Overreach: The law represents a shift in the regulation of corporate governance from states to the federal government, a move criticized by businesses and some lawmakers as inconsistent with principles of federalism.

The preliminary injunction halts the CTA’s enforcement while the case proceeds. However, the injunction is not a final ruling on the law’s constitutionality. Appeals are likely, and higher courts could ultimately decide the future of the CTA.

We’ll keep our clients informed of any new developments. In the meantime, hang out until we know more.

Whether you have already filed your BOI report or you have yet to, call us with questions.

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