If you own a small business, you may have just dodged a bullet you didn’t even know about. Last week, a federal judge in Texas issued a temporary restraining order against a new requirement that small companies identify their owners to the federal government. Since many small businesses remain unaware of the intrusive rule, this is a welcome reprieve for people who face nasty civil and criminal penalties for failing to comply. Don’t get too comfortable yet, though: The feds plan to appeal, which means you should probably still get your paperwork in order, just in case.
‘Significant Regulatory Punch’
Beneficial Ownership Information—specifically, ownership details about small corporations with 20 or fewer employees—reporting requirements were adopted in 2021, passing under most Americans’ radar.
“When Congress passed the 2021 National Defense Authorization Act, it included a bill called the Corporate Transparency Act (‘CTA’). Although the CTA made up just over 21 pages of the NDAA’s nearly 1,500-page total, the law packs a significant regulatory punch, requiring most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm,” Judge Liles C. Burke of the U.S. District Court for the Northeastern District of Alabama helpfully summarized in a court ruling earlier this year.
Burke wasn’t exaggerating about the “significant regulatory punch.” According to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which has responsibility for turning the screws on business owners regarding this law (and many others), “a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. However, this civil penalty amount is adjusted annually for inflation. As of the time of publication of this FAQ, this amount is $591.” You could also get two years in prison and a $10,000 fine.
Burke’s March ruling came in a lawsuit brought against the law by the National Small Business Association (NSBA), which contended that the law is unconstitutional. Burke agreed, finding the law didn’t even pretend to assert constitutional justification for the federal government imposing ownership reporting requirements on businesses incorporated under state laws. He forbade enforcement of the law against the NSBA and its members.
A Second Judge Tears Into the Law
That wasn’t the only lawsuit brought to block enforcement of the CTA. The Center for Individual Rights—representing the Texas Top Cop Shop, Data Comm for Business, Mustardseed Livestock, and the Libertarian Party of Mississippi—also sued, joined by the National Federation of Independent Businesses (NFIB). The decision in that case came on December 3, and if Burke was scathing in his opinion of the CTA, Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas was absolutely scorching.
The CTA “represents a Federal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several States,” wrote Mazzant. It also “ends a feature of corporate formation as designed by various States—anonymity. For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government.”
Importantly, added Mazzant, “Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power.”
Mazzant found that the plaintiffs had demonstrated that they face substantial harm from compliance costs, as the government itself admitted: “FinCEN estimates that the total cost of filing BOI reports is approximately $22.7 billion in the first year and $5.6 billion in the years after.” They also face potential harm to their rights to be free of federal laws unauthorized by the Constitution, rejecting federal claims that CTA is justified by the Commerce Clause and the Necessary and Proper Clause. CTA also threatens First and Fourth Amendment rights through the compelled disclosure of information.
“Having determined that the CTA is not justified by the Commerce Clause nor the Necessary and Proper Clause in conjunction with some enumerated power, the Court concludes that Plaintiffs have met their burden to show a substantial likelihood of success on the merits of their Tenth Amendment Challenge,” wrote Mazzant. “Without an injunction, Plaintiffs will almost certainly incur substantial, incompensable monetary costs and constitutional harm.”
Overly Clever Feds Talk Judge Into National Injunction
As in the case decided by Burke, the lawsuit asked for an injunction on behalf of the plaintiffs, including the membership of the NFIB. The federal government responded that given the NFIB’s large membership—roughly 300,000—such a move would, in practical terms, be a national injunction. Mazzant thought that was valid.
“The Court agrees with the Government’s point,” he wrote. “A nationwide injunction is appropriate in this case.”
That means everybody benefits from the injunction against the CTA, the reporting rule, and the January 1, 2025, deadline for compliance.
“The case is a remarkable victory for individual rights, and equally important, it is a victory for federalism,” responded the Center for Individual Right.
“The BOI reporting requirements are a harmful invasion of small business owners’ privacy and a misuse of their valuable time,” added Beth Milito, Executive Director of NFIB’s Small Business Legal Center. “Thankfully, the Court agreed and granted a preliminary injunction, giving small business owners a reprieve from this burdensome rule.”
But remember that this is a preliminary injunction based on a finding that the plaintiffs in this case are likely to prevail in their arguments that the federal government has no authority to impose Beneficial Ownership Information reporting requirements. The federal government has already indicated that it intends to appeal the decision, and the legal fight over the constitutionality of the CTA and the rules it imposes continues.
So, if you own a small business, check with your attorney or accountant to see if you’re covered by the law (FinCEN guide here) and to discuss what you should do in case the injunction is later lifted. You don’t want to be caught unprepared for a revived federal leviathan and its power to fine and imprison.
In the meantime, celebrate a welcome slap-down of an effort to expand government intrusions into new areas of our lives. Let’s all hope that it sticks.
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