Sometimes the best gift is simply the absence of something—especially if that something is an invasive federal rule that violates the privacy rights of millions of small business owners and usurps the rightful regulatory authority of individual states.
Thirty-two million American businesses received an early Christmas gift on December 3, when the U.S. District Court for the Eastern District of Texas granted a preliminary injunction that included a stay of the dreaded Beneficial Ownership Information Reporting Rule (“BOI Rule”) authorized by the Corporate Transparency Act (CTA). The rule creates a federal obligation for most small business entities to disclose personal information about their beneficial owners, senior officers, and other control persons to a new national database maintained by the Financial Crimes Enforcement Network (FinCEN).
FinCEN is a bureau of the U.S. Department of the Treasury and is most known for its administration of the Bank Secrecy Act to combat money laundering and terrorism financing. FinCEN acknowledged in a December 2022 press release that the agency would need “substantial resources to build a modern directory that employs real-time data verification, along with other data, information-sharing, and security best practices.” Indeed, the BOI Reporting Rule is a disquieting expansion of the agency’s authority that has resulted in significant budget increases leading up to its implementation.
Twenty-three types of entities are exempt from the rules, including publicly traded companies, nonprofits, and certain large operating companies. In other words, the FinCEN rule is specifically targeted at small businesses.
Until the passage of the CTA this kind of regulation belonged exclusively to the states. The Act effectively creates a new category of federal corporate regulation that authorizes the disclosure of individuals’ private information to foreign governments and regulatory agencies for the express purpose of criminal investigation without court authorization or agency justification.
Thanks to the federal court’s December ruling, American business owners are at least temporarily safe from facing federal criminal penalties for noncompliance and fines of $500 per day, pending final resolution of the lawsuit. Prior to the stay, attorneys and accountants nationwide scrambled to inform their clients of the new rules and the penalties for noncompliance.
Texas Top Cop Shop, Inc., et al v. Garland, et al. was the result of a few tenacious business owners under the leadership of the National Federation of Independent Businesses (NFIB) going to the mat on behalf of American businesses and farms. Among other things, plaintiffs argued that the reporting requirements violate the Fourth Amendment’s protections against unreasonable searches and seizures.
We sounded the alarm about this law last year, when the clock began ticking for millions of American businesses that would be required to file under the new rules. Since January 1, 2024, new businesses have been required to file initial reports within 90 days of notice of formation or registration. The rule’s estimated compliance burden for a single-member LLC is around 70 minutes on the low end, but FinCEN has acknowledged that its definition of “beneficial owner” will result in a substantially higher compliance time for more complicated ownership structures—to the tune of almost 11 hours. The injunction provides immediate relief to American business owners by imposing a nationwide prohibition against enforcement of the rule’s reporting requirements.
NFIB’s complaint cited a long line of precedent demonstrating that legal authority over general corporate formation belongs to the states, not to the federal government, and cited a 1987 Supreme Court ruling that said, “No principle of corporation law and practice is more firmly established than a State’s authority to regulate domestic corporations.”
The complaint called the CTA “an unconstitutional affront to the individual rights of Americans” that would “federalize the internal affairs of tens of millions of entities, whether they constitute for-profit commercial enterprises, political advocacy organizations, or even religious groups, while compelling invasive disclosures to federal regulators for the express purpose of criminal investigation. By so doing, the Act threatens cherished privacy and associational interests in those entities, upsets the careful balance between state and federal actors, and imposes chilling criminal consequences for millions of presumptively innocent people.”
Whether this temporary reprieve results in permanent dismissal remains to be seen. For now, American business owners can breathe a sigh of relief and be grateful for the early Christmas present.