Overview of the Corporate Transparency Act and the Beneficial Ownership Information Report’s Original Filing Requirement
In 2020, Congress passed the Corporate Transparency Act (CTA) to reduce money laundering and illicit flows of funds. Under the Act, business entities formed or registered to do business in the United States that are considered a Reporting Company were required to file a Beneficial Ownership Information Report (BOIR) with the U.S. Financial Crimes Enforcement Network (FinCEN) prior to January 1, 2025.
Information included in a filed BOIR includes the owner’s name, date of birth, address, and unique identifying numbers (such as a driver’s license or passport).
- A “Reporting Company” is defined as a corporation, LLC, or other entity created through a Secretary of State or similar office (“SOS”) or a company registered to do business by filing through an SOS.
- A “Beneficial Owner” is defined as one who directly or indirectly: (1) exercises substantial control over the Reporting Company, or (2) owns or controls at least 25% of the Reporting Company’s ownership interests. Because beneficial owners must be individuals (i.e., natural persons), trusts, corporations, or other legal entities are not considered to be Beneficial Owners. However, a Beneficial Owner may still need to be identified and disclosed.
There are 23 categories that may exempt businesses from being required to file. Also, there are exclusions for certain individuals to not be considered a “Beneficial Owner.”
Recent Developments in the CTA’s Evolving Relationship with the BOIR Filing Requirement
There have been numerous developments and updates regarding the BOIR filing requirement, including that in just the last month, the U.S. District Court for the Eastern District of Texas and the U.S. Court of Appeals for the Fifth Circuit issued a series of back-and-forth orders. These orders led to significant confusion about whether reporting companies are obligated to file a BOIR report or if the filing is voluntary.
In May 2024, Texas Top Cop Shop, Inc., a business located in Texas, along with several co-plaintiffs—including the National Federation of Independent Business (NFIB)—sued the U.S. Treasury and the U.S. Attorney General in the U.S. District Court for the Eastern District of Texas. In their complaint, the plaintiffs raised several constitutional arguments, including the argument that the CTA was constitutionally invalid “on its face” because it exceeded Congress’s authority under the U.S. Constitution. Plaintiffs requested the court enter a declaratory judgment and permanent injunction prohibiting defendants from enforcing the Act and vacating its implementing regulations.
On December 5, 2024, the district court issued a preliminary injunction in favor of the plaintiffs, staying the January 1, 2025, deadline for companies to comply with the CTA and file a BOIR. See Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, 2024 WL 5049220 (E.D. Tex. Dec. 5, 2024)
The district court’s decision in Texas Top Cop was not the first decision to address the CTA. Parties in multiple jurisdictions have sued to enjoin the enforcement of the CTA and its reporting rule, and courts have reached different conclusions about the law’s constitutionality. See, e.g., Nat’l Small Bus. United v. Yellen, 721 F. Supp. 3d 1260 (N.D. Ala. 2024) (finding the CTA is unconstitutional and granting a permanent injunction); Firestone v. Yellen, 2024 WL 4250192 (D. Or. Sept. 20, 2024) (finding the CTA is likely constitutional); Cmty. Ass’ns Inst. v. Yellen, 2024 WL 4571412 (E.D. Va. Oct. 24, 2024) (same).
Shortly after the Texas Top Cop court issued the preliminary injunction, the government requested a stay of the district court’s preliminary injunction. The district court denied the request, causing the government to appeal to the Fifth Circuit Court of Appeals seeking a stay of the preliminary injunction pending the outcome of the appeal.
On December 23, 2024, the Fifth Circuit granted the federal government’s request for an emergency stay of a nationwide preliminary injunction blocking enforcement of the CTA. This stay meant that reporting companies were obligated to file a BOIR with FinCEN under the CTA. However, the January 1, 2025, deadline for reporting companies to file was extended to January 13, 2025. See Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, 2024 WL 5203138 (5th Cir. Dec. 23, 2024).
Then on December 26, 2024, just a short three days later, the Fifth Circuit issued another order in Texas Top Cop Shop, Inc. v. Garland, which effectively reinstated the district court’s preliminary injunction. See Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, 2024 WL 5224138 (5th Cir. Dec. 26, 2024). The latter means that reporting companies are yet again not required to file a BOIR and adhere to the CTA. The federal government has now petitioned the U.S. Supreme Court to review the injunction. Garland v. Texas Top Cop Shop, No. 24A653 (U.S. Dec. 31, 2024).