Even though many small business owners have not heard of it, the federal Corporate Transparency Act poses a significant compliance obligation on many franchisors and franchisees in the state of Massachusetts. Worse, it can be difficult to tell exactly what your obligations are, or even if the Act applies to you.
The franchise lawyers at the Katz Law Group represent franchisors, franchisees, and master franchises, and can help you follow the law and avoid the penalties of noncompliance.
What is the Corporate Transparency Act?
The Corporate Transparency Act (31 U.S.C. § 5336) was passed as sections 6401 through 6403 of the National Defense Authorization Act of 2021. The goal of the Corporate Transparency Act is to combat money laundering. It does this by requiring covered corporations to disclose the identities of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) at the U.S. Department of the Treasury.
The information collected is then held on a private database for FinCEN's use.
Regulations implementing this so-called “reporting rule” were released on September 29, 2022 (87 Fed. Reg. 59498). They were then amended twice, on November 8, 2023, and again on November 29, 2023 (88 Fed. Reg. 83499). The final rules are found at 31 C.F.R. § 1010.
These regulations are extremely complex and hyper-technical, and are also still being tweaked. Nevertheless, compliance obligations began to go into effect on January 1, 2024.
Who is Covered By the Act?
The Corporate Transparency Act covers all corporations, limited liability companies (LLCs), or similar entities that are created by filing a document with a secretary of state. There are, however, over 20 exceptions for entities like banks, publicly traded companies, and non-profits (31 U.S.C. § 5336(a)(11)).
Nevertheless, FinCEN has estimated that there would be at least 32.6 million companies that have to report information under the Act (87 Fed. Reg. 59584).
What Has to Be Reported?
If your franchise is a “reporting company” under the Corporate Transparency Act, then it has to disclose its beneficial owners and provide their personal information. Beneficial owners are the individual people who own 25 percent or more of the business, whether directly or indirectly through another company, or who exercise substantial control over the business (31 CFR 1010.380(d)). The personal information that has to be provided to FinCEN's database includes the beneficial owners':
- Name
- Date of birth
- Complete and current address
- Passport, driver's license, or other identification number
- Photograph
Additionally, any changes to the company's beneficial ownership has to be reported within 30 days (31 CFR 1010.380(a)(2)). These could conceivably include changes to your address or to your name if you get married.
What are the Costs of Noncompliance?
Failing to provide the information required by the Corporate Transparency Act, or filing inaccurate information, comes with a fine of up to $500 per day of noncompliance, up to a maximum of $10,000 and two years in prison (31 U.S.C. § 5336(h)(3)).
Contact the Franchise and Small Business Attorneys at the Katz Law Group for Help
Whether your franchise or small business has to report its beneficial ownership to FinCEN or not will depend on the circumstances. However, the costs of not filing when you are legally obligated to file are substantial.
Call the franchise and small business lawyers at the Katz Law Group at (508) 480-8202 or contact them online.
