For business owners and managers fretting to come into compliance with the beneficial ownership reporting requirements of the Corporate Transparency Act ("CTA") before the upcoming deadline: congratulations, your procrastination has paid off! Last night, the U.S. Court of Appeals for the Fifth Circuit reinstated a nationwide injunction against enforcement of the CTA, which had previously been issued by the U.S. District Court for the Eastern District of Texas in Texas Top Cop Shop, Inc. v. Garland. As such, barring intervention by the full Fifth Circuit or by the U.S. Supreme Court, compliance with the CTA remains voluntary until the Fifth Circuit rules on the merits of an appeal of the district court’s decision – likely sometime in 2025.
For those of you who have already met your CTA reporting requirements: no harm, no foul. And for those of you who have no idea what the CTA is, or haven’t started dealing with it yet, here is some background, just in case the CTA springs back into effect at some point in the months, weeks, or (as things have been going lately) days ahead.
The CTA was enacted by Congress on January 1, 2021, over President Trump’s veto, as part of a defense authorization bill. Its purpose is to increase transparency in business ownership by establishing a federally-maintained, limited-access database of entities’ beneficial ownership information ("BOI"). Specifically, the CTA distinguishes between “reporting companies” and exempt entities, and it requires reporting companies to report their BOI to the Financial Crimes Enforcement Network ("FinCEN"). Newly formed entities must comply within 30 days, or within 90 days for entities formed in 2024. Entities formed before 2024 were originally required to come into compliance by December 31, 2024.
The term “reporting companies” captures a wide array of corporations, LLCs, and similar domestic and foreign entities doing business in the United States. The CTA exempts a number of heavily regulated businesses, as well as “large operating companies” with at least 20 full-time U.S.-based employees (excluding employees of affiliated entities), $5 million in U.S.-sourced gross receipts in the past year, and a physical office in the United States. It also exempts “inactive entities” that are over a year old, have no assets or transactions, and lack any direct or indirect foreign ownership. But all other entities, including most newly formed entities, real estate holding vehicles, and many small businesses, are covered by the CTA.
Reports filed with FinCEN are supposed to include an entity’s beneficial owners – and, for newly formed entities, company applicants – identified by their full legal name, date of birth, current address, and an image of state- or federally-issued identification (e.g., passport or driver’s license). Beneficial owners are individuals who directly or indirectly own at least 25% share of the entity’s stock, membership interests, or other equity interests. Company applicants are the individuals who direct the filing of the entity’s formation documents, often an attorney or an employee of a corporate service provider.
The CTA has spawned a number of state copycat laws and much litigation. New York, for instance, has enacted a law similar to the CTA, but it only applies to LLCs and is set to take effect on January 1, 2026. New Jersey has been considering similar legislation. Meanwhile, at least two federal courts have ruled the CTA unconstitutional, holding that it exceeds the powers vested in Congress. In March 2024, the U.S. District Court for the Northern District of Alabama reached this conclusion in National Small Business United v. Yellen, though its ruling was limited to the plaintiffs in that case. The federal court in Texas Top Cop Shop, however, went further, issuing a nationwide injunction against enforcement of the CTA earlier this month. The Fifth Circuit stayed that injunction earlier this week – leading FinCEN to unilaterally postpone the filing deadline to January 13, 2025. Last night, however, a different panel of that court’s judges lifted the stay. So for now, the CTA is back on hold.
Stay tuned for more information on this rapidly evolving situation. And best wishes for a healthy, happy, and prosperous 2025.
For more information about the CTA, please feel free to contact Jason Navarino, Hannah Greendyk, or any member of the Riker Danzig Corporate Group.
