On Dec. 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (CTA), effectively pausing its Jan. 1, 2025, compliance deadline. This decision in Texas Top Cop Shop, Inc. v. Garland et al. raises significant constitutional questions about federal overreach and the burdens placed on small businesses.

The CTA, enacted as part of anti-money laundering efforts, requires businesses to disclose beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN). With over 32 million U.S. businesses affected, the act aimed to enhance transparency and combat illicit financial activities, including money laundering and terrorism financing. However, critics argue the law disproportionately burdens small businesses with compliance costs, estimated to exceed $22 billion in its first year, while raising privacy and constitutional concerns.

Judge Amos L. Mazzant III granted the injunction, emphasizing the act’s potential violation of:

1. Federalism Principles: Corporate regulation is traditionally under state jurisdiction. The CTA’s federal oversight disrupts this balance, pushing the boundaries of Congress’s authority under the Commerce Clause.
2. First Amendment Protections: Plaintiffs, including the National Federation of Independent Business (NFIB), argued that the CTA improperly compels speech and association by mandating disclosure.
3. Fourth Amendment Privacy Rights: The act’s requirement to disclose sensitive ownership information raises significant privacy concerns relative to the safeguards against misuse of collected data.

Unlike an earlier decision in Alabama, which applied only to specific plaintiffs, this ruling halts enforcement of the CTA across the country. This approach was deemed to be necessary due to the wide-ranging impact of the law and because the NFIB represents members nationwide.

What This Means for Businesses

For now, businesses are not required to comply with the CTA’s reporting requirements. However, the legal landscape remains fluid. The Department of Justice (DOJ) has not indicated whether it will appeal, but litigation could extend to higher courts. Businesses should: (i) pause CTA compliance efforts, (ii) stay informed about potential appeals or regulatory adjustments that could affect enforcement; and (iii) consult legal counsel to evaluate their exposure under the CTA if the injunction is lifted.

The Road Ahead

This ruling adds momentum to broader challenges against federal regulatory overreach. It may set a precedent for scrutinizing laws that significantly impact small businesses and state-regulated areas. While the injunction offers immediate relief, the CTA’s fate could hinge on appeals or a potential shift in policy under a new presidential administration. For now, small businesses and legal professionals should remain vigilant as the case progresses, potentially reshaping the landscape of corporate regulation in the U.S.

If you have any questions or if we may be of further assistance regarding compliance or other healthcare matters, please feel free to contact Bill Kalogredis, Esq. or Sonal Parekh, Esq.

Learn more at Lamb McErlane, a full-service regional law firm based in West Chester, with additional offices in Philadelphia, Newtown Square, Oxford, and Mount Laurel, N.J. The firm has built a reputation for delivering the highest caliber of legal service in an environment focused on personal attention and results. Bringing the sophistication and experience equated with large, metropolitan firms, Lamb McErlane’s highly efficient, goal-oriented, and focused approach produces results that clients deserve.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., who contributed to this article, is a practicing attorney at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

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*This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic, any health care matter, or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.