Beneficial Ownership Information (BOI) Injunction

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction halting the enforcement of the Corporate Transparency Act (CTA), specifically targeting its Beneficial Ownership Information (BOI) reporting requirements. This Beneficial Ownership Information (BOI) Injunction decision has significant implications for businesses across the United States. To understand the impact, it’s essential to explore what the court’s ruling actually entails as well as the best practices businesses should adopt during this period of uncertainty.

History of Beneficial Ownership Information Reporting Under the CTA

Enacted in January 2021 as part of the National Defense Authorization Act, the Corporate Transparency Act aims to combat financial crimes such as money laundering and terrorism financing. A key provision of the CTA mandates that certain business entities disclose information about their beneficial owners—the individuals who ultimately own or control the company—to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.

The BOI reporting requirements were set to take effect on January 1, 2024. Under these rules, “reporting companies”—which include corporations, limited liability companies (LLCs), and similar entities—are required to submit reports to FinCEN containing personal identifying information about their beneficial owners. Companies formed before January 1, 2024, were given until January 1, 2025, to file their initial reports.

The Texas District Court is not the first to face a challenge to the CTA’s BOI Reporting requirements. Most notably, National Small Business United et al. v. Yellen et al. is a case out of the Northern District of Alabama currently on appeal before the 11th Circuit. In Yellen, the Plaintiffs argued that CTA violated the First, Fourth, Fifth, Ninth, and Tenth Amendments. The District Court ultimately agreed and granted the Plaintiffs’ motion for summary judgment, which was then appealed. The most significant difference between Yellen and the current matter out of Texas is the scope of the respective court decisions. In Yellen, the Alabama Court’s decision only applied to the named plaintiffs in that case. Conversely, the Texas Court’s recent decision applies to all businesses nationwide. But what exactly is the Texas case about?

Texas Top Cop Shop, Inc. et al. v. Garland et al. and Beneficial Ownership Information (BOI) Injunction

Texas Top Cop Shop involves a lawsuit brought by six plaintiffs composed of an eclectic mix of small businesses, one individual, the Libertarian Party of Mississippi, and the National Federation of Independent Business (NFIB) all seeking a court order declaring the CTA unconstitutional and permanently enjoining its enforcement by the federal government. the U.S. More specifically, the plaintiffs argued that the CTA’s BOI reporting requirements overstepped federal authority and infringed upon states’ rights under the Tenth Amendment, subjecting them to unjust compliance costs and privacy violations. The plaintiffs also raised arguments based on other Amendments, however, these arguments were not decided in the court’s order.

U.S. District Judge Amos Mazzant, agreeing with the plaintiffs’ arguments, determined that the plaintiffs had shown they were likely to succeed on the merits of their arguments. Therefore, Judge Mazzant granted the preliminary injunction. He described the CTA as an “unprecedented” attempt by the federal government to legislate in an area traditionally managed by the states, noting that it infringed upon the anonymity that various states provide in the formation of corporations. Judge Mazzant concluded that Congress lacked the authority under its powers to regulate commerce, taxes, and foreign affairs to adopt such a law, and that it likely violated states’ rights under the U.S. Constitution’s Tenth Amendment.

It is very important to reiterate here that there is a difference between a preliminary injunction and a permanent injunction. The former comes at the early stages of a case in order to prevent the moving party from suffering further injury stemming from an ongoing issue. A preliminary injunction is not a final adjudication of the underlying matter of law. For a court to grant a preliminary injunction, the moving party must show, among other things, that there is a substantial likelihood of success on the merits of its arguments. A permanent injunction meanwhile comes at the resolution of the dispute after the party seeking the injunction has actually succeeded on the merits. Just because a party receives a preliminary injunction does not automatically mean that they will ultimately prevail and obtain a permanent injunction too. Applying that to the present situation, business owners must keep in mind that the recent injunction is not guaranteed to remain in effect and proceed accordingly.

Moreover, the Department of Justice has appealed the decision, meaning the case will progress to higher courts, potentially even reaching the Supreme Court. At any point along the appeals process, one of these higher courts may reverse the District Court’s decision.

Best Practices for Businesses Awaiting a Final Decision on BOI Reporting

The preliminary injunction went into effect just weeks before the January 1, 2025, compliance deadline. Given the current legal uncertainty surrounding the CTA’s BOI reporting requirements, the best practices for businesses to follow include:

• Staying Informed: Monitor updates from reliable sources, including official communications from FinCEN and reputable news outlets, to stay abreast of any changes or developments in the legal proceedings.
• Maintaining Preparedness: Continue to gather and organize the necessary beneficial ownership information so that your business is ready to comply promptly if the injunction is lifted or the law is upheld upon appeal.
• Consulting With Legal Counsel: Engage with legal professionals to understand how the injunction and any future legal decisions may specifically impact your business and to receive guidance on compliance obligations.
• Evaluating State Requirements: Be aware that some states may have their own beneficial ownership reporting requirements. Ensure compliance with any applicable state laws, regardless of federal mandates.
• Implementing Strong Record-Keeping Practices: Maintain accurate and up-to-date records of your company’s ownership structure, as this information may be required for other regulatory purposes or future compliance needs.

By proceeding with caution, as if at any time the preliminary injunction could be lifted by a higher court, businesses can be prepared for whatever the fate of the CTA and BOI Reporting ultimately ends up being.