Corporate Transparency Act Faces Hurdles in Accomplishing Critical Mission

Credit: Whiteman Osterman & Hanna LLP 2025

The corporate form has been credited with accelerating the modern economy—domestically and abroad. Through its mechanisms, shareholders can passively invest in the corporation without fear of liability, theoretically allowing for a more efficient allocation of capital. The more investment that flows into corporations, the more businesses expand, jobs are created, and economies thrive. However, as corporate law has evolved and morphed over the decades, another side of the coin has emerged. 

The anonymity provided by the American corporate form has been criticized for shrinking the tax base and aiding money laundering through shell corporations. The cost of tax evasion—facilitated through offshore corporate structures—was estimated at $688 billion in 2021 alone, yet the annual tax gap may be closer to $1 trillion, according to former Internal Revenue Service Commissioner Charles Rettig. Meanwhile, $2 trillion is estimated to be laundered globally every year.

In response, Congress enacted the Corporate Transparency Act (CTA) in 2021, which aims to combat illegal activities made possible by corporate anonymity. Certain privately held companies would now have to submit identifying information to law enforcement, resulting in a swath of legal challenges. 

Texas Top Cop Shop Inc. v. Garland

Most recently, the law was challenged in federal court in the Eastern District of Texas by six plaintiffs, including various businesses, and the Libertarian Party of Mississippi. 

The District Court judge subsequently ruled in favor of the plaintiffs, issuing a nationwide injunction—which has since been stayed—on CTA enforcement due to its invalidity under the Commerce Clause and the Necessary and Proper Clause of the United States Constitution. There, the judge described the CTA as “quasi-Orwellian” and encroaching on corporate monitoring, which has historically been left up to the states. 

The plaintiffs argued that the CTA is unconstitutional both facially and as applied on three separate grounds. First, it impermissibly encroaches upon the state’s rights under the Ninth and Tenth Amendments. Secondly, it compels speech and burdens the plaintiff’s right to associate under the First Amendment. Thirdly, it violates the Fourth Amendment by compelling the plaintiffs to disclose private information. On these grounds, the plaintiffs then asserted that the Act’s specific reporting mechanism is also unconstitutional. 

On a request for a preliminary injunction, the plaintiff carries the burden of demonstrating a “substantial likelihood of success” on the merits. The court here held that the plaintiffs had satisfied their burden. More specifically, the court found that the Act is invalid under the Commerce Clause because it does not regulate channels or instrumentalities of commerce nor does it regulate an activity. The court also found the government’s arguments unavailing that the Act fell under Congress’s power to regulate foreign affairs and taxation through the Necessary and Proper Clause, pointing to a potential substantial expansion of federal authority that would “wreak havoc” on federalism. 

The case has since been appealed to the Fifth Circuit and reached the United States Supreme Court. The Supreme Court stayed the injunction on January 23, pending the disposition of the ongoing appeal in the Fifth Circuit. Despite the Court’s ruling, another injunction remains in place from a separate challenge. As the fate of the CTA is decided, its merits deserve further scrutiny. 

The Requirements of the CTA:

The CTA requires “reporting companies,” which includes corporations, limited liability companies, and similar entities to report information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN). The statute, 31 U.S Code § 5336, defines a “beneficial owner” as an individual who “directly or indirectly” exerts “substantial control” over the entity or owns or controls 25% or more of the ownership interests of the entity. Violations of the Act include civil and criminal penalties, ranging from a maximum monetary fine of $250,000 to five years in federal prison.

Under the statute, companies (and company applicants within 30 days of formation) are required to submit a report to FinCEN that identifies each of their beneficial owners by: (1) full legal name, (2) date of birth, (3) a current residential or business address, and (4) a unique identifier or a FinCEN identifier. However, the reports are not public information. The reports are submitted to FinCEN, which may then only disclose the beneficial ownership information to law enforcement, national security, and intelligence agencies upon request. Although the Act pierces the corporate veil, the information remains confidential. 

Despite its requirements, the Act contains a significant exemption. Entities that (1) have more than twenty full-time employees in the United States, (2) reported more than $5 million to the IRS in aggregate receipts or sales in the previous year, and (3) have an operating presence at an actual physical office in the United States are exempt from submitting a report to FinCEN. In sum, there are twenty-four exemptions, which include banks and insurance companies. Given that the CTA is meant–in part–to tackle the proliferation of shell companies, it makes theoretical sense to exempt large bona fide enterprises or institutions that are already subject to significant regulatory scrutiny. Conversely, the exemptions lead to the Act mostly targeting smaller businesses, letting larger corporations off the hook. Naturally, this has drawn the ire of businesses across the country, stirring momentum for its repeal. 

The Two Sides of The CTA:

The clearest case against the CTA is that it primarily burdens smaller businesses. Companies with at least twenty employees, $5 million in revenue, and a physical presence in the United States are exempt, leaving approximately 32 million small businesses under the reporting purview of the Act. Businesses with few employees, with lower revenue, or both will have to allocate resources to comply with the Act. Given that these may be less sophisticated enterprises, the potential for compliance errors may also be higher, which could lead to penalties. Republican lawmakers currently attempting to repeal the Act have also stated that it infringes on small business owners’ privacy rights. To be sure, the corporate veil has long been one of the strongest legal doctrines in American jurisprudence, and the CTA arguably blows a hole right through it. 

Conversely, the CTA provides critical tools for law enforcement to combat both tax evasion and money laundering. Corporate anonymity has made that goal much harder to achieve, allowing potential wrongdoers to evade liability through complex corporate structures. Given the immense cost that this imposes on the American taxpayer, it stands to reason that the public’s interest should override that of corporations. The CTA was also passed with bi-partisan support, even overriding a presidential veto to get passed—indicating that the broader public is in favor of greater corporate transparency. 

The CTA’s future is uncertain. FinCEN just announced that it will not “issue any fines or penalties or take any other enforcement actions” against companies that do not file or update their beneficial ownership information by the new filing deadline of March 21, effectively rendering compliance voluntary. 

Further, FinCen has publicly stated that it intends to solicit public comment on potential revisions to the existing reporting requirements, as part of “anticipated rulemaking to be issued later this year to minimize the burden on small businesses while ensuring that BOI is highly useful to important national security, intelligence, and law enforcement activities.” As FinCen attempts to strike the right balance in its rulemaking, the need to combat tax evasion remains. A balanced approach—enhancing transparency while easing the burden on small businesses—could ensure accountability without stifling legitimate enterprises.

*The views expressed in this article do not represent the views of Santa Clara University.