Update: Court issues preliminary injunction for Corporate Transparency Act
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On again, off again…the Corporate Transparency Act remains paused after a flurry of legal activity that took place in December.
The Corporate Transparency Act, or the CTA, is the federal law that requires many companies to register their ownership with the Financial Crimes Enforcement Network (also known as FinCEN, a part of the Treasury Department) in conjunction with federal efforts to combat money laundering, tax fraud, and terrorist funding.
On December 3, a federal judge in Texas issued a nationwide injunction blocking the law from taking effect (the law would have taken effect January 1, 2025). The court determined the act is likely unconstitutional and that its implementation would harm reporting companies if they were forced to comply.
However, the government appealed and the appellate court in New Orleans on December 23 stayed the injunction and put the CTA back in effect, pending the outcome of the appeal.
Then, on December 27, the appellate court vacated its stay, putting the injunction in place again.
What does all of this mean for contractors?
As of this publication (and likely through at least March 2025), there’s no filing requirement for businesses needing to comply with the reporting requirements; however, that could change.
The appellate court could ultimately side with the government and the filing requirement would be reinstated. If that happens, FinCEN would issue new filing deadlines.
Or, the court could sustain the challenge to the law. Of course, the matter could end up in front of the Supreme Court; additionally, it’s possible that the incoming administration will rescind the reporting rule.
The CTA was enacted as part of the 2021 National Defense Authorization Act and would require LLCs and other covered entities to report personal and financial information about the organizations, their owners, and their managers.
Reporting requirements for businesses in the name of corporate transparency would have unfairly targeted small businesses, ACCA strongly believed. In spring 2024, ACCA attended a hearing to address implementation of the CTA and also sent a letter in opposition to the act. The hearing focused specifically on the increased regulatory burden CTA enforcement places on small businesses in respect to reporting and compliance.
Companies affected by CTA would have been required to file a beneficial ownership report by January 1, 2025 if they were created or registered to do business prior to January 1, 2024. Companies created or registered on or after January 1, 2024, and before January 1, 2025 would have had 90 calendar days after receiving notice of the company’s creation or registration to file their reports. More information about the reporting requirements can be found on FinCEN’s website. FinCEN also published a Beneficial Ownership Information Small Entity Compliance Guide which can be found here.
In conjunction with the hearing ACCA attended in spring 2024, ACCA President and CEO Barton James sent a letter to Senator Tommy Tuberville and Representative Warren Davidson who introduced legislation to repeal the CTA. The letter states:
This law unfairly targets small businesses, including many of our members, by classifying any entity with fewer than 20 employees or under $5 million in revenues as a “shell company.” This sweeping definition mandates extensive reporting of “beneficial owners” to FinCEN, covering everyone from owners to any influential person within the company.
FinCEN’s current expectation of receiving over 32 million such reports annually attests to the CTA’s excessive reach and the impracticality of its enforcement. The law’s effectiveness is further doubtful as it relies on self-reporting by the very individuals it seeks to regulate. Furthermore, the recent District Court ruling in Northern Alabama, which found the CTA to exceed constitutional bounds, highlights the Act’s legal fragility. Despite this, many small businesses remain under the threat of severe penalties for non-compliance.
Any person who would have “willfully violated” CTA’s beneficial ownership reporting requirements would have been subject to a civil penalty of up to $591 for each day that the violation continues. They may also have been subject to criminal penalties up to 2 years imprisonment and a fine of up to $10,000. Violations included willfully neglecting to file a beneficial ownership report, willfully filing false beneficial ownership information, or willfully failing to correct previously filed beneficial ownership information.
It’s important for contractors to watch for future updates on these burdensome reporting requirements. ACCA will continue encouraging Congress and the incoming administration to roll back this and other regulatory burdens on small businesses.
This article was originally published May 3, 2024. It was updated on December 4, 2024 following the court’s preliminary injunction ruling, and then again on January 3, 2025.
Posted In: Government, Legal, Regulation Reform
