The Corporate Transparency Act ("CTA") (31 U.S.C. § 5336) has done more to confuse small business owners than it has done to achieve its goal of cracking down on crimes. Ever since the CTA was enacted by Congress on January 1, 2021, as part of the National Defense Authorization Act and went into effect of January 1, 2024, it has been a legal tennis match of whether or not companies have to follow it. The purpose of the CTA was to help prevent and combat money laundering, terrorist financing, corruption, and tax fraud through shell companies, thereby preventing business owners from hiding or benefiting from owning U.S. companies and engaging in illegal operations.
Under the CTA, small businesses that meet certain criteria are required to submit a beneficial ownership information ("BOI") report to the U.S. Department of Treasury's Financial Crimes Enforcement Network ("FinCEN"). This submission requires business owners to identify information about individuals who directly or indirectly own or control a company. According to the CTA, "[a] beneficial owner is an individual who either 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."[1] An individual who can exercise substantial control over a reporting company can do so in one of four ways: (1) be a senior officer, (2) have the authority to appoint or remove certain officers or a majority of directors, (3) be an important decision-maker, and/or (4) fall into one of the catch-all categories explained in FinCEN's Small Entity Compliance Guide (see Chapter 2.1, "What is substantial control?"). Failure to submit the proper paperwork could put small business owners at risk of criminal penalties, imprisonment, and fines up to $10,000.00. The original deadline for filing the BOI report to FinCEN was January 1, 2025, but due to legal challenges has not yet been enforced.
Since its implementation, the CTA has faced numerous legal challenges, adding to the confusion about its future and the requirements imposed on small businesses around the country. One of CTA's most notable legal challenges came in Tex. Top Cop Shop, Inc. v. McHenry, No. 4:24-cv-478, 2024 U.S. Dist. LEXIS 218294 (E.D. Tex., Dec. 3, 2024) (formerly Tex. Top Cop Shop, Inc. v. Garland). In the U.S. District Court for the Eastern District of Texas, Judge Amos Mazzant granted a nationwide injunction just weeks before the January 1, 2025, deadline for filing. This nationwide injunction barred the FinCEN from enforcing the reporting requirements and extended the deadline to submit BOI reports while the litigation proceeded.
However, on January 23, 2025, the Supreme Court of the United States ("SCOTUS") issued a ruling granting the government's motion to lift the nationwide injunction against the CTA's filing requirements that was granted in Tex. Top Cop Shop. McHenry v. Tex. Top Cop Shop, Inc., 2025 U.S. LEXIS 424 (2025). This ruling would have reinstated the filing requirements and caused small businesses to submit their BOI reports to FinCEN before an established deadline or potentially face penalties. Unsurprisingly, the Supreme Court's ruling was not the end of this saga. The Supreme Court's ruling does not seem to affect a separate nationwide order coming from the Eastern District of Texas in the case of Smith v. U.S. Dep't of the Treasury, according to the FinCEN. Smith v. U.S. Dep't of the Treasury, No. 6:24-cv-00336 (E.D. Tex., Jan. 7, 2024). With the injunction surviving in Smith, once again, the time requirement to submit BOI reports has been delayed. According to FinCEN's website, the nationwide order from Smith remains in place, and companies are not required to file BOI reports with FinCEN, despite the Supreme Court's action in Tex. Top Cop Shop. Current guidance from FinCEN specifically states, that "[i]n light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports."[2]
As of now, small businesses in the United States are not required to file BOI reports with FinCEN; however, this most likely will not be the end of the saga with the CTA. Supreme Court's interim order in Tex. Top Cop Shop related to issues purely on the nationwide injunction – but the high court still has not issued a ruling on the constitutionality of the CTA. With the current change in leadership of the United States, the future of the CTA is still to be determined.
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[1] FinCEN, https://fincen.gov/boi-faqs#D_1 (last visited Jan. 27, 2025).
[2] FinCEN, https://fincen.gov/boi (last visited Jan. 27, 2025)
