Navigating Corporate Transparency Under Federal and State Disclosure Laws
4.21.2025
The ongoing tension between privacy and government enforcement continues to grow. With rising global instability, federal governments have increased efforts against international threats. These efforts have taken many forms, from tightening national border security to considering a nationwide ban on TikTok. An ongoing controversy that has gained the fear of the corporate world is the Corporate Transparency Act, a federal law aimed at collecting information about the beneficial owners of companies formed in the United States.[1] The primary goal of the legislation is to combat financial crimes.[2] However, the act has sparked significant controversy in federal courts. Critics argue that while fighting illicit finance is important, there must be limits to how much personal and private business information the government can demand. Many also express concerns about the administrative burden and financial costs that compliance with the CTA will impose on small and mid-sized companies. In this article, I will give a brief summary of what the Corporate Transparency Act entails, its intended purpose, and its current status, especially in light of the ongoing federal litigation challenging its scope and constitutionality.
Background and Purpose of the Corporate Transparency Act
The Corporate Transparency Act is a federal law enacted on Jan. 1, 2021, as part of the National Defense Authorization Act for fiscal year 2021.[3] Its primary goal is to combat financial crimes – such as money laundering and terrorism financing – by requiring most entities formed or registered under state law to disclose personal information about their beneficial owners[4] to the Treasury Department’s Financial Crimes Enforcement Network.[5],[6] When the CTA was enacted it applied to corporations, limited liability companies and other similar entities operating in the United States, with certain exemptions for larger or more heavily regulated organizations.[7] FinCEN is tasked with maintaining this information in a secure, nonpublic database for at least five years after the reporting company is terminated.[8] The data may be accessed by federal agencies for national security, intelligence or law enforcement purposes, and by state and local law enforcement agencies with a court order. The CTA also includes safeguards to ensure the confidentiality of the reported information.[9]
The CTA has faced multiple legal challenges, with courts questioning its constitutionality on various grounds, including alleged violations of the 10th Amendment and the Necessary and Proper Clause.
Federal Court Challenges
Before FinCEN issued its interim final rule, there was significant litigation surrounding the constitutionality of the CTA. Two key cases repeatedly shifted in their treatment of the CTA’s beneficial owner information reporting requirements, particularly as courts struggled with plaintiffs’ requests for preliminary injunctions.
Texas Top Cop Shop, Inc. v. Garland
In Texas Top Cop Shop, Inc. v. Garland, [10] four corporate entities, the CEO of one of those entities and an organization of independent business owners filed suit against the U.S. attorney general, the secretary of the treasury, the Department of the Treasury and FinCEN. The plaintiffs sought a declaration that the CTA and its implementing regulations,[11] which require companies to report beneficial ownership information to FinCEN, were unconstitutional. They also moved for a preliminary injunction to halt enforcement of the CTA and its regulations.[12]
The plaintiffs, including Texas Top Cop Shop, Inc., argued that the CTA imposed unconstitutional federal mandates on entities formed under state law, thereby violating core principles of federalism. They also raised privacy concerns, asserting that the mandatory disclosure of ownership information to FinCEN infringed upon individual rights.[13] On Dec. 3, 2024, the U.S. District Court for the Eastern District of Texas granted the motion for a preliminary injunction, temporarily enjoining nationwide enforcement of the CTA’s reporting requirements.[14] The court held that the plaintiffs’ alleged compliance costs exceeded de minimis levels and constituted irreparable harm, as such costs were nonrecoverable.[15] Rejecting the government’s argument that compliance was not burdensome, the court found that being compelled to comply with a potentially unconstitutional regulation was itself a form of irreparable injury. FinCEN did not dispute the existence or irrecoverability of the compliance costs.
Following the issuance of the injunction, the government appealed to the Fifth Circuit. On Dec. 23, 2024, a motions panel temporarily stayed the injunction, allowing the CTA’s reporting requirements to remain in effect.[16] However, just three days later, on Dec. 26, the panel assigned ultimately to hear the merits of the appeal vacated that stay, reasoning that the injunction should remain in place to preserve the constitutional status quo while the parties’ substantial legal arguments were considered.[17]
Smith v. United States Dep’t of the Treasury
Meanwhile, in a separate case before the same district court, the judge enjoined enforcement of the CTA only as to the named plaintiffs but stayed the effective date of the reporting rules nationwide “while [the] lawsuit [was] pending.”[18]
On Jan. 7, 2025, in Smith v. United States Department of the Treasury,[19] plaintiffs Samantha Smith and Robert Means challenged the constitutionality of the CTA and its implementing rule issued by FinCEN.[20] The plaintiffs, who had formed LLCs under Texas law to hold real property, argued that the CTA exceeded Congress’s enumerated powers under the Constitution.
The court granted plaintiffs’ motion for a preliminary injunction, finding that the CTA represents an unprecedented expansion of federal authority beyond constitutional bounds.[21] In its analysis, the court closely examined the CTA’s relationship to interstate commerce and concluded that the statute does not regulate the channels or instrumentalities of interstate commerce, nor activities that substantially affect such commerce.[22] It also noted the absence of a jurisdictional element linking the CTA’s requirements to interstate activity and found any connection between the regulated activity and interstate commerce too attenuated to support congressional authority.[23]
Accordingly, the court held that the plaintiffs were likely to succeed on the merits of their constitutional challenge.[24] It emphasized that the CTA compels the disclosure of personal information from millions of private entities and intrudes upon an area – business formation and regulation – traditionally governed by state law. Echoing the reasoning in Texas Top Cop Shop, Inc., the court found that the plaintiffs would suffer irreparable harm if forced to comply and concluded that both the balance of equities and the public interest favored the issuance of a preliminary injunction.
End of the Preliminary Injunctions
After the Fifth Circuit’s Dec. 26 decision to vacate its earlier stay in Texas Top Cop Shop, Inc. v. Garland, the government sought emergency relief from the U.S. Supreme Court, requesting either a full stay of the injunction or, alternatively, a limitation of its scope to the named plaintiffs. On Jan. 23, 2025, in McHenry v. Texas Top Cop Shop, Inc., the U.S. Supreme Court granted the government’s request, staying the injunction pending the Fifth Circuit’s decision on appeal and, if timely filed, the disposition of a petition for a writ of certiorari.[25] If certiorari were denied, the stay would terminate automatically; if granted, it would remain in effect until the court issued its final judgment.[26]
Just three weeks later, the U.S. District Court for the Eastern District of Texas relied on the precedent set in McHenry to grant a stay of the preliminary injunction issued in Smith v. United States Department of the Treasury (the final case that had been blocking enforcement of the CTA and delaying the beneficial owner information reporting deadlines). As a result, the judicial branch finally allowed the CTA to go into full effect. However, the executive branch then changed course via a new set of regulations issued by FinCEN.
Regulatory Shifts in Response
On March 21, 2025, FinCEN issued an interim final rule exempting certain U.S.-created entities from the reporting requirements under the CTA.[27] The rule introduced three significant changes.
First, it removes the requirement for U.S. and tribal companies to report beneficial owner information to FinCEN. It excludes tribal entities from the definition of a “Reporting Company” and clarifies that domestic entities formed under tribal, state or federal law are exempt from the CTA’s reporting requirements.[28] As a result, entities that previously qualified as domestic reporting companies and were required to file initial, updated and corrected beneficial owner reports are no longer subject to those obligations, regardless of whether their beneficial owners or persons with substantial control are U.S. or non-U.S. persons.[29] Regarding tribal entities, the rule exempts both tribally chartered entities and those formed under state law.[30] Whether wholly or partially owned by a tribal government, these entities are not subject to beneficial ownership information reporting.[31]
Second, the rule maintains beneficial owner reporting for foreign reporting companies, defined as corporations, LLCs or other entities formed under the laws of a foreign country and registered to do business in any U.S. state or tribal jurisdiction through a filing with a secretary of state or similar tribal authority, unless exempt.[32] These entities must still report beneficial ownership information unless they qualify for one or more applicable exemptions.[33]
Third, the rule removes the requirement for foreign reporting companies to report beneficial owners who are U.S. persons.[34] Foreign reporting companies must now report only their non-U.S. beneficial owners.[35] If all beneficial owners are U.S. persons, the company is exempt from reporting them but may still be required to file information about the entity itself. The deadline for foreign reporting companies to file initial beneficial ownership reports, or to update or correct previously filed reports, has been extended to April 25, 2025, or 30 days after the company registers to do business in the U.S., whichever is later. They must also comply with deadlines for future updates and corrections.
Implications and Outlook
These regulatory changes have lifted a significant burden for domestic entities, and for now, it appears that the privacy of American company owners remains protected. However, it’s still too early to tell whether future amendments or new legislation will reintroduce the overly burdensome framework of the previous CTA. It is also important to note that several states have enacted their own versions of the CTA. Of particular relevance, the New York LLC Transparency Act remains fully in effect, with its reporting deadline approaching next year.
The New York LLC Transparency Act, effective Jan.1, 2026, requires only LLCs – unlike the broader scope of the federal CTA – to report beneficial ownership information to the New York Department of State if they are formed or authorized to do business in New York.[36] Modeled after the CTA, the New York act mandates that each covered LLC file a beneficial ownership disclosure identifying every company applicant and beneficial owner by their full legal name, date of birth, current residential or business street address and a unique identifying number from a valid identification document.[37]
An LLC that qualifies for one of the 23 exemptions under the CTA is also exempt from the New York law’s disclosure requirements.[38] However, unlike the federal rule, the New York law does not automatically excuse exempt entities from reporting obligations. Instead, exempt LLCs must file an attestation of exemption with the New York Department of State, under penalty of perjury, within 30 days of formation or qualification to do business in New York.[39]
Conclusion
Although the long legal battle surrounding the CTA appears to have settled – at least for now – foreign owners and companies are still likely to challenge its requirements. While the most immediate wave of controversy has passed, attention is now shifting toward state-level laws that mirror the CTA’s objectives.
It’s only a matter of time before the New York LLC Transparency Act faces legal challenges of its own. The law marks a significant shift in the balance between corporate privacy and transparency in New York, a state widely recognized as a hub for business. If business owners are now required to comply with the New York law’s reporting obligations, it raises important questions about how this might affect New York’s corporate market.
Given the CTA has already been subject to intense legal scrutiny, it is reasonable to expect that New York’s version will face similar challenges. Whether those efforts will succeed remains to be seen. Practitioners across the U.S. – and especially in New York – should stay alert for updates to both the Corporate Transparency Act and the New York LLC Transparency Act over the coming year, as these developments could significantly impact their clients’ business operations.
Piero Sauñe Casas, a third-year law student from Lima, Peru, graduated cum laude from Manhattanville College in 2021 with a bachelor’s in political science. He is editor-in-chief of NY Real Property Law Journal. This article appears in NYLitigator, a publication of the Commercial and Federal Litigation Section. For more information, please visit NYSBA.ORG/COMFED.
Endnotes:
[1] 31 U.S.C. § 5336 (West).
[2] Id.
[3] 116 P.L. 283; 2021 Enacted H.R. 6395; 116 Enacted H.R. 6395; 134 Stat. 3388.
[4] The CTA defines a beneficial owner as an individual who, directly or indirectly, exercises substantial control over the reporting company or who owns or controls at least 25% of the ownership interests of the reporting company. Substantial control is exercised if the individual serves as a senior officer of the reporting company, has appointment or removal authority of any senior officer or board of directors or has a substantial influence over important decisions made by the reporting company. Beneficial owners do not include minor children, agents or custodians on behalf of another individual, employees, individuals with inheritance interests or creditors. Ownership interests refer to economic-related instruments, including but not limited to, equity, stock, investment, instrument convertible, option, privilege, contract or arrangement in the entity. Ownership or control of ownership interests refers to an individual’s relationship with the reporting company, including but not limited to, joint ownership, agency, trustee, recipient of income and through ownership of intermediary entities that own or control ownership interests of the reporting company. FinCEN’s regulations further provide guidance on the calculation of total ownership interests based on capital, profit, and stock. See Julie Hung, How To Comply With the New Corporate and LLC Transparency Acts, NYSBA NYLitigator (2024), Vol. 29, No. 1.
[5] Nat’l Small Bus. United v. Yellen, 721 F. Supp. 3d 1260 (N.D. Ala. 2024) (Non-profit corporation and corporation’s member filed complaint against Treasury Department, Treasury Secretary, and acting director of the Department’s Financial Crimes Enforcement Network (FinCEN), alleging that mandatory disclosure requirements of the Corporate Transparency Act (CTA) were unconstitutional.); 116 P.L. 283; 2021 Enacted H.R. 6395; 116 Enacted H.R. 6395; 134 Stat. 3388.
[6] Id.
[7] Companies may be U.S. or non-U.S. entities. Domestic reporting companies include corporations, LLCs and entities created by filing a document with the secretary of state or similar office under state or Indian tribe laws. Foreign reporting companies include corporations, LLCs, entities formed under the law of a foreign country and entities that are registered to do business in any state or tribal jurisdiction by filing a document with the secretary of state or similar office under state or Indian tribe laws. There are 23 categories of entities exempt from the CTA’s reporting requirements, including banks, securities entities, insurance companies, accounting firms and large operating companies with a physical office in the U.S., more than 20 full-time employees and more than $5,000,000 in annual gross sales. See Julie Hung, How To Comply With the New Corporate and LLC Transparency Acts, NYSBA NYLitigator (2024), Vol. 29, No. 1.
[8] Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, 2024 WL 5049220 (E.D. Tex. Dec. 5, 2024); Smith v. United States Dep’t of the Treasury, No. 6:24-CV-336-JDK, 2025 WL 41924 (E.D. Tex. Jan. 7, 2025).
[9] 116 P.L. 283; 2021 Enacted H.R. 6395; 116 Enacted H.R. 6395; 134 Stat. 3388.
[10] Texas Top Cop Shop, 2024 WL 5049220.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Smith v. United States Dep’t of the Treasury, No. 6:24-CV-336-JDK, 2025 WL 41924 (E.D. Tex. Jan. 7, 2025).
[19] Id.
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] Id.
[25] McHenry v. Texas Top Cop Shop, Inc., 145 S. Ct. 1 (2025).
[26] Id.
[27] FinCEN Interim final rule, FINCEN-2025-0001, Beneficial Ownership Information Reporting Requirement Revision and Deadline Extension March 26, 2025, https://www.federalregister.gov/documents/2025/03/26/2025-05199/beneficial-ownership-information-reporting-requirement-revision-and-deadline-extension.
[28] Id.
[29] Id.
[30] Id.
[31] Id.
[32] Id.
[33] Id.
[34] Id.
[35] Id.
[36] New York S.995B/A.3484 (2023).
[37] New York S.995B/A.3484 (2023); The terms “company applicant” and “beneficial owner” follow the definitions set forth in the CTA.
[38] New York S.995B/A.3484 (2023).
[39] Id.
