Corporate Transparency Act Undermined: Legal Chaos and Its Implications
5.30.2025
In early 2021, the United States Congress enacted the Corporate Transparency Act, introducing significant changes to corporate reporting requirements. The primary goal of the act is to enhance transparency in business ownership and combat illegal activities such as money laundering and tax evasion.[1] The law officially took effect on Jan. 1, 2024, mandating approximately 33 million small businesses to report beneficial ownership information to the U.S. Treasury Department’s .[2]
Although the Corporate Transparency Act initially faced temporary judicial challenges before being reinstated, the Financial Crimes Enforcement Network has announced a pause on penalties and enforcement for noncompliance. Furthermore, it has issued an interim final rule that removes the beneficial ownership information reporting obligations for U.S. companies and U.S. persons under the CTA. This article outlines the key provisions of the act, its legal status, the businesses required to comply and the broader implications for organizations.
What Is the Corporate Transparency Act?
The Corporate Transparency Act requires certain business entities, defined as reporting companies, to file beneficial ownership information with the Financial Crimes Enforcement Network unless exempt. Under the original law, the CTA’s reporting requirements apply to any entity that is either formed in the U.S. or registered to do business in the U.S. through the filing of a document with the secretary of state or a similar office. Entities that meet specific exemption criteria are not subject to these requirements.[3]
The reporting company is required to report its full legal name and any trade names or doing business as names, its business address, jurisdiction of formation and taxpayer ID. Additionally, the reporting company must disclose details about its beneficial owners, including their full legal name, date of birth, residential address, and their identification number from an acceptable identification document (e.g., passport or driver’s license) along with a scanned copy of the document.[4]
A beneficial owner is an individual who either exercises substantial control over the company, or owns or controls at least 25% of its ownership interests. Examples of individuals with substantial control include senior officers, someone with the authority to appoint or remove senior officers or a majority of directors, an important corporate decision-maker, and/or someone with any other form of substantial control identified by the Financial Crimes Enforcement Network’s Small Entity Compliance Guide.[5]
Under the original law, reporting companies formed before the end of 2023 must have filed their initial reports by Jan. 1. Companies formed during 2024 had 90 days to file their initial reports, and companies created in 2025 or later must file within 30 days of their formation. Furthermore, reporting companies must file updated reports within 30 days of any changes to the reported information.[6]
Entities that fail to report by the deadlines may face civil penalties of up to $591 per day per entity while the violation continues, and criminal penalties of up to $10,000 and/or two years in prison for beneficial owners of noncompliant entities.
Recent Judicial Developments: Navigating the Legal Uncertainty
On Dec. 3, 2024, the U.S. District Court for the Eastern District of Texas granted a preliminary injunction against enforcement of the Corporate Transparency Act and its implementing regulations.[7] The court found that the plaintiffs demonstrated a substantial likelihood of success in showing that the CTA exceeded Congress’s constitutional authority, as it could not be justified under either the commerce clause or the necessary and proper clause.
The court ruled that Congress lacked authority under the commerce clause for several reasons. The CTA does not regulate channels or instrumentalities of commerce, nor does it govern existing commercial activity – it instead compels new activity.
Additionally, the court rejected the argument that the Corporate Transparency Act is justified under the necessary and proper clause. First, it found that requiring companies to disclose private information simply because they exist does not stem from Congress’s commerce power. Second, it determined that the CTA does not fall within Congress’s foreign affairs authority since it regulates domestic matters – specifically, the anonymous existence of companies registered to do business in a U.S. state and their potential conduct. Finally, the court concluded that the CTA is not a valid exercise of Congress’s power to lay and collect taxes, as it does not impose any tax, whatsoever.[8]
However, on Dec. 23, 2024, the U.S. Fifth Circuit Court of Appeals reversed the district court’s ruling by granting a temporary stay of the injunction.[9] The Court of Appeals found that the government had made a strong case for the CTA’s constitutionality, stating that a reporting requirement for entities engaged in these economic activities falls within “more than a century of [the Supreme] Court’s Commerce Clause jurisprudence.”[10]
In a surprising turn, on Dec. 26, 2024, a merits panel from the Fifth Circuit reinstated a nationwide injunction, halting CTA enforcement once again. The panel vacated the motions panel’s order granting the government’s stay, citing the need to preserve the constitutional status quo while considering substantive arguments.
On Jan. 23, the U.S. Supreme Court overturned the lower court’s order blocking the enforcement of the CTA. However, the Financial Crimes Enforcement Network announced that companies would not be subject to liability for failing to file required reports due to a separate nationwide injunction in Smith v. U.S. Department of the Treasury.[11] As a result, companies were not required to submit beneficial ownership information but could do so voluntarily.
On Feb. 18, as expected, the U.S. District Court for the Eastern District of Texas in Smith v. U.S. Department of the Treasury stayed the nationwide preliminary injunction on the enforcement of the CTA. Accordingly, the beneficial ownership information reporting requirements under the CTA were reinstated and became mandatory. In a statement released the same day,[12] FinCEN acknowledged that reporting companies might need additional time to comply with the beneficial ownership information reporting obligations, extending the deadline by 30 calendar days to March 21.
However, on Feb. 27, in a surprising reversal, the Financial Crimes Enforcement Network announced that it would not issue fines, penalties, or take enforcement action against companies that miss their beneficial ownership information reporting deadlines for the time being. FinCEN also revealed plans to issue an interim final rule to extend reporting deadlines and provide additional guidance.
More surprisingly, on March 2, FinCEN announced that it would not enforce the CTA against U.S. citizens or domestic reporting companies. The Department of the Treasury issued a statement confirming that, once the upcoming rule changes are implemented, U.S. citizens and domestic reporting companies will not be subject to enforcement actions under the CTA.[13] Further solidifying this position, on March 21, FinCEN released its interim final rule, which removes the beneficial ownership reporting obligations for U.S. companies and U.S. persons under the CTA.[14]
Implications of the Judicial Rulings
The chaotic judicial and governmental developments surrounding the enforcement of the Corporate Transparency Act have significant implications and consequences across various domains.
First, the recent rulings generated remarkable legal uncertainty on businesses, which were left unsure whether compliance with the CTA was legally required given the conflicting rulings and the temporary injunction issuance and overturning.
Furthermore, the continuous reversals of court orders created significant ambiguity around the CTA and suggested a lack of coordinated reasoning and procedural stability in the courts, which may undermine public confidence in the judiciary.
Additionally, the rapid succession of contradictory rulings has caused delays and complications in the enforcement of the CTA, ultimately diminishing its effectiveness. FinCEN’s revision of the definition of a “reporting company” – narrowing it to entities formed under foreign laws and registered to do business within a U.S. state or tribal jurisdiction – further weakens the government’s ability to ensure broad compliance and collect accurate data. As a result, the CTA’s central goal of enhancing transparency is compromised by its limited applicability and minimal enforcement.
Finally, the interim final rule creates uneven regulatory burdens, imposing higher administrative and compliance costs on entities formed under foreign laws and registered to do business in the U.S., compared to domestic businesses.
Conclusion
The decisions surrounding the Corporate Transparency Act’s enforcement have created significant legal, regulatory, and economic uncertainty.
They undermine the effectiveness of the law, delay its intended benefits, and set a precedent for ongoing challenges to federal authority. The current judicial scenario further highlights the complex interplay between legislative, executive, and judicial branches in implementing regulatory frameworks. Inconsistent judicial decisions and delayed enforcement diminish trust in the government’s ability to implement and uphold laws effectively.
Ultimately, the lack of clarity has placed unnecessary burdens on businesses, particularly small and medium-sized companies, which lack the resources to effectively monitor and adapt to shifting compliance requirements. In addition, this uneven landscape and lack of enforcement jeopardizes the purpose of the CTA and allows bad actors to exploit the fragility of the legal procedure to perpetuate money laundering and tax evasion.[15]
Lorenzo Rovini is a dual-qualified attorney (Italy & New York) and an associate at the Law Office of Alexander Paykin, where he focuses on real estate and complex commercial litigation. He is a member of the Chartered Institute of Arbitrators, as well as the NYSBA Real Property Law, Commercial & Federal Litigation, and Dispute Resolution sections. This article appears in a forthcoming issue of the N.Y. Business Law Journal. For more information, please visit NYSBA.ORG/BUS.
Endnotes:
[1] Ronald W. Sessa, Navigating the Corporate Transparency Act and the New Reporting Requirements for Real Estate Transfers to Trusts or Business Entities (November 6, 2024), https://www.porterwright.com/media/navigating-the-corporate-transparency-act-and-new-reporting-requirements-for-real-estate-transfers-to-trusts-or-business-entities/.
[2] Steven Friedman, Opinion: The Corporate Transparency Act and the Burden It Creates for Real estate Organizations,HousingWire (August 14, 2024), https://www.housingwire.com/articles/the-corporate-transparency-act-and-the-corporate-burden-it-creates/.
[3] Based on FinCEN’s estimates, only 11% of entities registered or operating in the U.S. will qualify for an exemption. See Corporate Transparency Act – Implementing New Requirements on U.S. Real Estate Businesses, Clifford Chance (February 2024), https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2024/02/Corporate%20Transparency%20Act%20-Implementing%20New%20Requirements%20on%20U.S.%20Real%20Estate%20Businesses.pdf
[4] See id.
[5] See https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf.
[6] Ongoing compliance will be a much bigger issue for reporting companies than the initial filing process.
[7] Texas Top Cop Shop, Inc., et al. v. Garland, et al., E.D. Tex., Case No. 4:24-cv-00478-ALM.
[8] The government notes that “Congress determined that the lack of beneficial ownership information allows criminals to obscure their income and assets and thus ‘facilitates . . . serious tax fraud.” However, a regulation is not constitutional simply because it carries with it an incidental tax benefit. This is the category that the CTA falls under.
[9] Full copy of the order at https://cases.justia.com/federal/appellate-courts/ca5/24-40792/24-40792-2024-12-24.pdf.
[10] Because Congress only needs a “rational basis” to conclude that a regulated activity “substantially affects interstate commerce,” enacting the CTA was within its commerce power.
[11] See Smith v. U.S. Dep’t of Treasury, No. 6:24-cv-00336-JDK, Dkt. 30 at 33–34 (E.D. Tex. Jan. 7, 2025).
[12] See https://fincen.gov/sites/default/files/shared/FinCEN-BOI-Notice-Deadline-Extension-508FINAL.pdf.
[13] The Dep’t of the Treasury noted that it intends to pursue rulemaking to relegate the CTA to a narrow scope for foreign reporting companies.
[14] The foreign entities, however, will not be required to report any U.S. persons as beneficial owners and U.S. persons will not be required to report BOI with respect to any such entity for which they are a beneficial owner.
[15] Removing the reporting obligations of U.S. entities and U.S. individuals substantially limits the number of required filings. By FinCEN’s own estimate in the interim final rule, it anticipates roughly 12,000 filings annually (over each of the first three years). In the final reporting rule in effect prior to the interim final rule, FinCEN estimated roughly 10,510,000 filings annually (over each of the first five years).
