Beneficial ownership information reporting struck down by federal court

Less than one month before the deadline for small businesses to report beneficial ownership information, a federal court has struck down the new requirement, taking companies off the hook … for now.

On Tuesday, Dec. 3, Judge Amos L. Mazzant III of the Eastern District of Texas federal court ordered a preliminary injunction that prevents the federal Financial Crimes Enforcement Network (FinCEN) from enforcing the Corporate Transparency Act. For the time being, that effectively kills beneficial ownership information reporting requirements that were due Jan. 1, 2025.

Mazzant’s order is another blow to the federal government’s attempt to collect information from small businesses in an effort to prevent financial crimes often committed through shell companies.

Earlier this year, an Alabama federal district court ruled that collecting beneficial ownership information is unconstitutional in a lawsuit filed by the National Small Business Association. However, the judgment enjoining the rule applied only to association members, leaving all other affected companies on the hook to file by Jan. 1, 2025.

The latest federal court ruling is a sweeping, nationwide injunction that applies to all companies that were required to report beneficial ownership information. That includes corporations, limited liability companies and “any other entities created by the filing of a document with a secretary of state or any similar office in the United States” that were formed before Jan. 1, 2024 and have 20 or fewer employees.

More information about beneficial ownership information reporting can be found here.

Companies formed after Jan. 1, 2024, had a 90-day window to file beneficial ownership information under the Corporate Transparency Act. Although Mazzant’s order singles out the Jan. 1, 2025 deadline, corporate law attorney Hershel Howard of the law firm Foley & Lardner confirmed with Land Line that by blocking the entire Corporate Transparency Act, new companies that have not already filed are also off the hook.

Tuesday’s court order could clear up confusion for millions of small-business owners. Many, if not most, were completely unaware of the new requirements. Among those who did know, there was confusion about who needed to file and what information was needed.

In July, more than 100 trade associations representing a wide variety of industries wrote a letter to the Senate Committee on Banking requesting a delay in reporting beneficial ownership information. The groups, which represent everyone from veterinarians to funeral directors to roofing contractors, said that relatively few businesses, including owner-operators, were aware of the new requirement.

According to the coalition letter, few companies were complying because few knew about the beneficial ownership information rules.

“Although filing under the (Corporate Transparency Act) began at the start of this year, only a few million businesses have registered, while an estimated 28 million covered small businesses have yet to file,” the coalition letter states. “This compliance rate of less than 10 percent is a direct result of the general lack of awareness among business owners regarding the new rules. While the business community and FinCEN have gone to great lengths to educate small-business owners, it is clear additional time is needed. Absent a delay, millions of law-abiding citizens will be at risk of steep fines and criminal penalties come the end of this year.”

Even Congress got involved. Sens. Tim Scott, R-S.C., and James Lankford, R-Okla., introduced an amendment to the FY2025 National Defense Authorization Act that would provide the business community and federal regulators more time to educate small-business owners about the new reporting requirements.

Mazzant’s order is a preliminary injunction and not a final judgment. Essentially, the order found that the plaintiffs in the case will likely succeed in their arguments claiming the Corporate Transparency Act is unconstitutional as the case moves forward.

The federal government immediately filed a notice of appeal with the Fifth Circuit. If the court of appeals rules in favor of the government, the injunction could be lifted, and companies would be back on the hook to report beneficial ownership information. In the meantime, small-business owners have one less form to worry about. LL