Now What? CTA Declared Unconstitutional By Texas Court

On Tuesday December 3rd, with less than one month to go before a filing deadline applicable to some 30+ million small businesses, a federal district court in Texas has declared the Corporate Transparency Act unconstitutional.  The court proposes to enjoin its application nationally – meaning that it would not be in effect anywhere in the country.  In this aspect, the court's opinion differs from an Alabama case delivered in early 2024, which only stopped the law from applying to the plaintiffs in that specific case.  

The Texas court pulled no punches, calling the law “quasi-Orwellian” and claiming that it encroaches on the country's legal system, which divides regulatory power between the states and the federal government.  The court also said the law does not actually regulate “commerce” and is outside the constitutional powers of the federal government.

WHY IT MATTERS

The central question, of course, is what regulated businesses should do between now and the end of 2024.  As and when the court enters its proposed injunction, the law will be “stayed” nationwide and be of no effect.  Given that millions of companies have an initial filing due before the start of 2025, the timing of this decision creates great uncertainty.

In that regard, there are several things to note:

• The case law so far is divided on the CTA.  Different courts have come out differently on whether it passes constitutional muster;
• Federal regulators have already appealed prior decisions holding the law unconstitutional;
• Although the law will remain in limbo during any such appeal, the online filing system to accept CTA reports remains available to companies that wish to comply with otherwise-applicable deadlines; 
• The law passed with large majorities in both houses of Congress;
• Federal regulators spent years gearing up for its enforcement efforts;
• Most other western economies already had a similar law in place prior to the passage of the CTA, and the US already required similar disclosures in the banking context (i.e., a company cannot open a bank account without disclosing some of what the CTA requires); and
• New York has passed, and other states are likely to pass, a similar state-level law that will apply to companies doing business in that state.

It is highly likely, given all the resources invested in the CTA's passage and implementation, that the regulator will appeal the Texas court's decision.  We do not, of course, know the outcome of any such appeal.  If the regulators succeed in defending the law, any deadlines that have been suspended will be reinstated and companies subject to the law will have to catch up on their filings, potentially on a hurried basis.  This could create a compliance scramble in 2025.  Moreover, given that the states are starting to hop on the CTA bandwagon, it is likely that many businesses will have to make some sort of disclosure anyway.  

The scope of the disclosures required under the CTA is minimal.  Despite this, complex corporate structures can mean that it takes weeks or months to manage the CTA reporting process.  Any company that is currently covered by the law can still make its filing timely.  Assuming the law is upheld in whole or in part, that may be easier than betting that the law goes away…and getting the bet wrong.