Extremely Important Update

On November 19, 2024, I posted information about the Corporate Transparency Act (“CTA”). The CTA requires almost all small businesses organized either as a corporation or an LLC to report detailed information regarding both the entity and personal information about the “beneficial owners.” I reported a January 1, 2025, filing deadline for existing entities. The CTA provides harsh civil penalties and also criminal (felony) penalties for willful failure to file.

Think: Just about every small business lining your town’s business streets. For more background, read my earlier piece here. Then come BACK. There have been some significant new developments.

On Hold. For Now.

But maybe not for too long. On December 3, 2024 (four days ago, as I write this), the United States District Court for the Eastern District of Texas issued a preliminary nationwide stay against FinCEN enforcing the CTA.

In Texas Top Cop Shop, Inc. v. Garland, the court held that the CTA likely violated the Constitution on a number of grounds. One of the requirements for a plaintiff (in this case, Texas Top Cop Shop, Inc.) to meet when securing a preliminary injunction against an opposing party (in this case, FinCEN) is to convince the court that the plaintiff stands a likely chance of prevailing. The preliminary injunction will then apply until the court has an opportunity to hear the full case.

The preliminary injunction prohibits FinCEN from any enforcement action and suspends the January 1, 2025, filing deadline for all reporting entities nationwide.

FinCEN has filed an emergency appeal of the injunction to the Fifth Circuit Court of Appeals in New Orleans. The Fifth Circuit could completely reverse the District Court or perhaps narrow the scope of the injunction to the parties to the litigation. In this case, however, one of the parties (in addition to Texas Top Cop Shop) is the National Federation of Independent Business (NFIB), which has over 300,000 members (many readers of this column may be members). The District Court reasoned that with so many members, a nationwide injunction would be appropriate.

Well. Now What? What to Do?

My crystal ball is in for repairs, so I am not sure. You do have options.

Within the next week or so the Fifth Circuit might reverse the nationwide injunction or narrow it to NFIB members. If it does not provide an extension of the January 1 filing deadline that will not leave much time to assemble the appropriate entity and beneficiary owner information (Merry Christmas!). In that case, an owner may elect to move forward with collecting the information (rather than taking a “wait and see” approach).

In fact, FinCEN may still accept voluntary filings, so an owner may elect to simply file.

On the other hand, if the Fifth Circuit sustains the District Court’s nationwide injunction, it will be a case of how quickly the Supreme Court takes it up (in this case, they almost certainly would).

There is another similar case bubbling up out of the Northern District of Alabama. The Eleventh Circuit, in Atlanta, is hearing FinCEN’s appeal of the Alabama district court decision now. The injunction there, however, is limited to the parties only (which also includes a much smaller trade group than the mighty NFIB).

Finally, there is a political calculus. Unless your name is Rip Van Winkle, you know the government will be changing hands next month. It remains to be seen how enthused the new administration will be to employ FinCEN’s full enforcement array.

Bottom Line: Please be on the lookout for updates in my email newsletter. I promise to keep readers updated. Sorry if that results in more emails, but for people affected the information is too important.

A Few Legal Observations

The Texas Top Cop Shop opinion is 75 pages (yes, I read it; it’s a ‘lawyer thing’) of good legal reasoning. There are nearly 33 MILLION businesses subject to the CTA. As the judge notes, “the Commerce Clause does not justify regulating all companies based on nothing more than the fear that a reporting company might shelter a financial criminal.” Regulating 33 million businesses (which, the court noted, traditionally has been the province of the states) to ferret out the wrongdoing of a small group is overkill.

Thank you, judge, I have felt that way about the CTA since I first began to dig into a year or two ago.

Now for the downside of the decision. No reflection on the judge who has plenty of precedent on his side, but I personally take issue with the ability of a single federal district court judge to issue a nationwide injunction.

In these political tense times, separating the rules (procedure) from desired ends (substance) is important. Rules and procedure are guardrails to protect both sides of a political issue. The Senate is an example. Many Democrats likely rue the day that Democratic Senate leader Harry Reid decided to suspend the filibuster (generally a Senate rule requiring 60 senators to agree on a course of action or a nominee) for federal judicial nominees. A year or so later, the Republicans controlled the Senate and the judicial pipeline was open. When it comes to rules, “what goes ’round, comes ’round.”

Back to nationwide injunctions. Currently, there are 677 authorized federal district court slots. Due to vacancies, there is never that amount serving. Perhaps at any time there are 550 to 600 serving. That is a bit more than the 535 members of Congress. The difference, however, is that each of those judges sitting in a narrow geographic area can issue a ruling having nationwide impact.

Congress could address that. Perhaps there could be a requirement for approval by a small panel of appellate court judges before a nationwide injunction could issue. Just a thought.

Again, stay tuned.