Beneficial Ownership Information Reporting Requirements (Corporate Transparency Act)December 29th, 2023
The Corporate Transparency Act (CTA) is a new federal law that requires certain business entities to report information about their beneficial owners, i.e., the individuals who ultimately own or control the entity, to the Financial Crimes Enforcement Network (FinCEN). The purpose of the CTA is to prevent the misuse of shell companies and other opaque ownership structures by bad actors who seek to hide or benefit from their ill-gotten gains. The CTA will affect many businesses in the United States, including franchisors and franchisees. Franchisors are entities that grant the right to use their trademarks, trade names, service marks, or other identifying symbols to other entities, known as franchisees, in exchange for fees or royalties. Franchisees are business operators that operate under the franchisor’s brand and system, following the franchisor’s standards and guidelines.
If you are a franchisor or a franchisee, you may be wondering what the CTA means for you and how to comply with it, including:
- Who has to report beneficial ownership information under the CTA?
- What information has to be reported and when?
- How to report the information and what are the penalties for non-compliance?
- What are some best practices for franchisors and franchisees to comply with the CTA?
Who has to report beneficial ownership information under the CTA
The CTA applies to “reporting companies,” which are defined as any corporation, limited liability company, or similar entity that is created by filing a document with a secretary of state or a similar office under the law of a state or Indian Tribe, or formed under the law of a foreign country and registered to do business in the United States. However, there are some exceptions for certain types of entities that are already subject to existing federal or state disclosure requirements, such as banks, credit unions, insurance companies, public companies, charities, churches, and political organizations. A full list of exempt entities can be found in the Beneficial Ownership Information Reporting Rule.
Franchisors and franchisees may or may not be reporting companies, depending on their specific circumstances. For example, a franchisor that is a publicly traded company may be exempt from the CTA, while a franchisor that is a privately held corporation or a limited liability company will typically be a reporting company. Similarly, a franchisee that is a sole proprietorship or a general partnership may not be a reporting company, while a franchisee that is a corporation or a limited liability company will typically be a reporting company. If you are not sure whether your entity is a reporting company or an exempt entity, you should consult with a legal or financial professional.
What information has to be reported and when?
Reporting companies have to report the following information about their beneficial owners and applicants:
- Full legal name
- Date of birth
- Current residential or business street address
- A unique identifying number from an acceptable identification document, such as a passport, driver’s license, or state identification card, or a FinCEN identifier
A “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- Owns or controls at least 25% of the ownership interests of the reporting company; or
- Exercises substantial control over the reporting company.
An “applicant” is an individual who files an application to form or register a reporting company under the laws of a state or Indian Tribe, or under the laws of a foreign country to do business in the United States.
The reporting deadline depends on when the reporting company was formed or registered. Reports will be accepted starting on January 1, 2024. If your entity was created or registered:
- Prior to January 1, 2024, you will have until January 1, 2025, to report beneficial ownership information.
- On or after January 1, 2024, and before January 1, 2025, you must report beneficial ownership information within 90 calendar days after receiving actual or public notice that your entity’s creation or registration is effective, whichever is earlier.
- On or after January 1, 2025, you must report beneficial ownership information within 30 calendar days after receiving actual or public notice that your entity’s creation or registration is effective.
You must also update or correct any previously reported information within 30 days of any change.
How to report the information and what are the penalties for non-compliance?
Reporting companies have to report beneficial ownership information electronically through FinCEN’s website: www.fincen.gov/boi.
The CTA imposes civil and criminal penalties for failing to report, or for reporting false or fraudulent information. The penalties include fines of up to $10,000 and imprisonment of up to two years for each violation.
What are some best practices for franchisors and franchisees to comply with the CTA?
Franchisors and franchisees should take the following steps to prepare for and comply with the CTA:
- Review your entity’s status and determine whether you are a reporting company or an exempt entity.
- Identify and verify the beneficial owners and applicants of your entity, and collect the required information from them.
- File or update your beneficial ownership information with FinCEN by the applicable deadline.
- Maintain accurate and complete records of your beneficial ownership information and reporting activities.
- Monitor any changes in your entity’s structure, ownership, or control, and update your information accordingly.
- Educate and train your staff, partners, and advisors on the CTA requirements and procedures.
- Seek professional guidance if you have any questions or concerns about the CTA.
The CTA is a significant new law that aims to enhance transparency and accountability in the United States. Franchisors and franchisees should be aware of their obligations and responsibilities under the CTA, and take proactive steps to comply with it. By doing so, they can avoid potential penalties, protect their reputation, and contribute to the fight against money laundering, terrorism financing, tax evasion, and other illicit activities.