How the Corporate Transparency Act Affects Franchise Systems

A brief overview of the new legislation and its implications for franchisors and franchisees

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a new federal law that was passed in January 2021 as part of the National Defense Authorization Act. The CTA aims to prevent money laundering, tax evasion, and other illicit activities by requiring certain corporations and limited liability companies (LLCs) to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).

A beneficial owner is defined as an individual who directly or indirectly owns 25% or more of the entity or exercises substantial control over the entity. The CTA excludes certain entities from the reporting requirement, such as publicly traded companies, banks, insurance companies, nonprofits, and entities that have more than 20 employees and more than $5 million in gross receipts or sales.

How does the CTA affect franchise systems?

The CTA has significant implications for franchise systems, as many franchisors and franchisees operate as corporations or LLCs that may fall under the reporting requirement. Franchise systems may have complex ownership structures that involve multiple layers of entities and individuals, making it challenging to identify and report the beneficial owners.

Franchisors and franchisees that are subject to the CTA will have to submit a report to FinCEN that includes the following information about each beneficial owner: name, date of birth, address, and unique identifying number (such as a passport or driver’s license number). The report must be filed at the time of formation or registration of the entity and updated within one year of any change in the beneficial ownership information. The CTA imposes civil and criminal penalties for failing to comply with the reporting requirement or providing false or fraudulent information.

What are the benefits and challenges of the CTA for franchise systems?

The CTA may have some benefits for franchise systems, such as enhancing the transparency and accountability of the franchise industry, deterring fraud and abuse, and facilitating due diligence and compliance. The CTA may also help franchise systems avoid potential liability or reputational damage from being associated with entities or individuals that are involved in illegal or unethical activities.

However, the CTA also poses some challenges for franchise systems, such as increasing the administrative and financial burden of reporting, exposing sensitive and confidential information to the government and the public, and creating uncertainty and confusion about the scope and applicability of the law. The CTA may also raise some privacy and security concerns for the beneficial owners, as their personal information may be vulnerable to hacking, leaking, or misuse.

How can franchise systems prepare for the CTA?

Franchise systems should take proactive steps to prepare for the CTA, such as:

• Reviewing and updating their ownership structures and records to identify the beneficial owners of their entities.
• Developing and implementing policies and procedures for collecting, verifying, and reporting the beneficial ownership information to FinCEN.
• Training and educating their staff, partners, and advisors on the CTA requirements and best practices.
• Monitoring and complying with the CTA regulations and guidance that will be issued by FinCEN and other agencies.
• Seeking legal and professional assistance if needed to ensure compliance and avoid penalties.

The CTA is a significant change in the federal regulation of business entities, and it will affect many franchise systems in the U.S. Franchise systems should be aware of the CTA and its implications, and take the necessary steps to comply with the law and protect their interests.

Holon Law Partners has 100+ years of experience combined guiding clients through complex cases and legal intricacies. Our approach is empathetic, customized, and client-centered with a focus on you and your unique business needs. To schedule a consultation with us, call our team at (866) 372-0726 or email us at: info@holonlaw.com.