The Corporate Transparency Act: A Legal Battleground in 2025
The Latest Updates on the Corporate Transparency Act
Note: The Corporate Transparency Act and its legal challenges form an evolving situation that may require updates as new information emerges.
The Corporate Transparency Act (“CTA”) became law on January 1, 2021. The federal government created it to combat money laundering and other financial crimes, by effectively banning anonymous shell companies long used to hide illicitly obtained funds. The CTA proved popular to Congress, receiving bipartisan support in both the House and Senate.
Although popular, the CTA remains highly controversial, and its constitutionality is uncertain. Lawsuits challenging its enforcement are ongoing nationwide. Two cases from the Eastern District of Texas could soon prompt the judiciary to issue a definitive ruling. A nationwide injunction currently blocks enforcement, and the Fifth Circuit will soon hear oral arguments on its constitutionality. These legal battles have already reached the Supreme Court on procedural grounds, and may require its intervention again soon as to constitutionality.
In the coming months and years, the CTA will either become an example of legislative overreach or a critical component of the government’s battle against organized and white-collar crime. It all comes down to the Commerce Clause of Article I, Section 8, Clause 3 of the Constitution. The Merritt Law team is sharing the latest updates from the evolving legal battle surrounding the Corporate Transparency Act.
What is the Corporate Transparency Act?
The Corporate Transparency Act mandates most businesses and legal entities (“Reporting Companies”) in the United States file Beneficial Ownership Reports (the “Reporting Rule”) with the Financial Crimes Enforcement Network (“FinCEN”). These reports disclose information about the entity filing the report and individuals who exert control over or own at least 25% of the entity (“Beneficial Ownership Reports”). The most critical component of the CTA is also what makes it so controversial: it reveals to the government the individuals behind the legal entities.
Legal Battle:
Texas Top Cop Shop, Inc. v. McHenry
District Court: Eastern District of Texas
On December 3, 2024, the Eastern District of Texas – Sherman Division issued a nationwide preliminary injunction (“Texas Top Injunction”) blocking enforcement of the CTA. Plaintiffs, including small businesses and national advocacy groups, sued government entities, arguing the CTA is unconstitutional both on its face and in its enforcement.
In its order, the court asserted its belief that the Corporate Transparency Act likely violates the Tenth Amendment because Congress lacks the constitutional authority to pass such legislation. The court rejected the Defendants’ contention that Congress possesses such authority via the Commerce Clause, as the states have traditionally handled corporate formation and regulation. The court argues the CTA imposes obligations on businesses even when they solely engage in intrastate commerce, despite the states historically regulating such commerce.
The order is not a final ruling on this issue; it is merely the court anticipating its verdict. The court is not bound to make a final ruling consistent with this order and may ultimately rule in favor of the CTA’s constitutionality.
The plaintiffs also argued the CTA improperly compels speech in violation of the First Amendment and infringes upon privacy rights under the Fourth Amendment. However, the court did not discuss the validity of these arguments.
Defendants filed a motion to stay the Texas Top Injunction pending appeal with the District Court, which it denied.
Appellate Court: Fifth Circuit Court of Appeals
Defendants then filed a notice of appeal and an emergency motion to stay the Texas Top Injunction pending appeal.
On December 23, 2024, a Fifth Circuit motions panel stayed the Texas Top Injunction, concluding that Congress has the authority under the Commerce Clause to regulate anonymous business ownership and operation affecting interstate commerce.
On December 26, 2024, the Fifth Circuit merits panel reinstated the Texas Top Injunction. This decision does not reject the motions panel’s ruling but aims to preserve the status quo until oral arguments, currently scheduled for March 25, 2025.
Supreme Court of the United States
Defendants then filed an application with the Supreme Court for a stay of the Texas Top Injunction.
On January 23, 2025, the Supreme Court granted the stay, pending the Fifth Circuit’s ruling on the appeal and the Supreme Court’s decision on a writ of certiorari[1], if filed in time.
This ruling temporarily lifts the Texas Top Injunction, likely until late March or early April, given the scheduled oral arguments on March 25, 2025 before the Fifth Circuit. For now, the Texas Top Injunction no longer blocks CTA enforcement.
Smith v. United States Department of the Treasury
On January 7, 2025, the Eastern District of Texas – Tyler Division issued a preliminary injunction (“Smith Injunction”), delaying the Reporting Rule’s effective date temporarily, halting the CTA’s enforcement nationwide as a result. Like the court in Texas Top Cop Shop, this court believes the CTA likely violates the Tenth Amendment because Congress lacked the authority to pass it. However, as in Texas Top Cop Shop, the court has not ruled on the CTA’s constitutionality, only paused its enforcement.
Where things currently stand:
Enforcement of the Corporate Transparency Act remains paused as a result of the Smith Injunction. However, the Fifth Circuit may follow the Supreme Court’s approach in Texas Top Cop Shop and temporarily stay the Smith Injunction during the appeals process. Reporting Companies should stay alert, as CTA enforcement could resume soon.
The Supreme Court’s procedural ruling in Texas Top Cop Shop may not be its final word on the CTA. The Court may ultimately deem it necessary to rule on the CTA’s constitutionality, given the conflicting rulings across jurisdictions, which include:
- National Small Business United v. Yellen: The Northern District of Alabama granted summary judgment, finding the CTA unconstitutional but limiting the ruling to members of the National Small Business Association. Like in the Texas case, the Alabama court ruled Congress lacked the authority to pass the CTA in violation of the Tenth Amendment. This decision is on appeal to the Eleventh Circuit, which has not yet ruled.
- Firestone v. Yellen: The District of Oregon denied a preliminary injunction, finding that Congress had the authority to enact the CTA under the Commerce Clause and the Necessary and Proper Clause. The court rejected Tenth Amendment violations claims and dismissed allegations of First, Fourth, Fifth, Eighth, and Ninth Amendment violations.
- Community Associations Institute v. Yellen: The Eastern District of Virginia denied a preliminary injunction, similarly ruling that Congress had authority under the Commerce Clause. The court also rejected First and Fourth Amendment challenges.
The CTA’s popularity may have since waned in Congress. The House of Representatives released a bill on December 17, 2024, relating to the December 20, 2024 government funding deadline containing a provision to extend the CTA’s reporting deadline for entities formed before 2024 from January 1, 2025, to January 1, 2026. However, the final version of the funding bill signed into law did not include this extension.
On January 24, 2025, FinCEN stated that Reporting Companies do not have to file Beneficial Ownership Reports and will not face penalties for not filing while the Smith Injunction is in effect. However, they may file voluntarily if they choose.
What’s Next in 2025?
The nationwide injunction is pivotal in the ongoing legal battles over the CTA. As of 2025, the CTA’s constitutionality, particularly concerning the Commerce Clause, remains unclear given the conflicting jurisdiction rulings. As a result, businesses grapple with uncertainty about their regulatory compliance obligations.
Legal analysts expect the U.S. Supreme Court to weigh in on the CTA’s constitutionality, given its nationwide significance and the inconsistent lower court rulings. Until then, businesses should remain vigilant, monitoring developments and ensuring readiness to comply with Beneficial Ownership Report requirements. The outcome of these challenges will have far-reaching implications for the future of corporate governance and transparency in the United States.
Have questions about the impact of the Corporate Transparency Act and how to keep track of the latest updates? Our experienced lawyers at Merritt Law are monitoring the situation and can provide the partnership and corporate legal services you need to keep your business in compliance. Schedule a consultation to learn more about how we can help.
[1] A request by a party to the Supreme Court to review a lower court’s ruling.
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