The franchising industry will undoubtedly be impacted by new laws and updates to existing laws this year. With 2024 in full swing, let’s review legislative developments at the state and federal levels that may impact New York franchisors and franchisees.
Corporate Transparency Act – Federal Law
The Corporate Transparency Act (CTA) was enacted by Congress in 2021 and took effect on Jan. 1, 2024. The CTA is a federal law that requires many companies formed or operating in the United States to report their beneficial ownership information (BOI) to Treasury’s Financial Crimes Enforcement Network (FinCEN), which will store this sensitive information in a secure, confidential database.
The U.S. Department of the Treasury has prioritized efforts to implement the CTA to crack down on shell companies. The Department believes it will prevent corrupt and other actors from laundering illicit funds through anonymous companies in the U.S., and equip law enforcement and other partners with the information they need to disrupt financial anonymity that enables crimes such as corruption, drug trafficking, and terrorism.
Deadlines. Many corporations and limited liability companies (LLC) are required to report information to FinCEN about the individuals who ultimately own or control them. FinCEN began accepting reports on Jan. 1, 2024. Qualifying reporting companies established before Jan. 1, 2024 must file before Jan. 1, 2025. Those created between Jan. 1, 2024, and Jan. 1, 2025, will have 90 days from either the actual notice of formation or public announcement, whichever comes first, to file. Businesses established on or after January 1, 2025, will have 30 days from notification or public announcement of their formation to submit their first report to FinCEN.
Penalties. There are monetary fines and prison sentences at stake for non-compliance with the CTA. As per the FinCEN:
“…a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a BOI report, willfully filing false BOI, or willfully failing to correct or update previously reported BOI.”
Considering it is a new law, there are some safety nets. “If you make a mistake in a report but correct it within 90 days of when the report was originally due, you may avoid being penalized,” FinCEN noted.
Failure to properly comply with the CTA may result in liability for the owners of Franchisor and franchisee entities. As FinCEN also noted, “the senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.”
While certain entities are exempt from the BOI reporting requirements, franchisors and franchisees should not assume they qualify for an exemption. Consult your NY franchise lawyer to determine what your company must do to comply with the CTA.
LLC Transparency Act – NY State Law
For New York based franchisors and franchisees, there is an even broader level of “transparency” to consider. In late December 2023, New York Gov. Kathy Hochul signed the LLC Transparency Act, which creates a database of the beneficial owners of limited liability companies that is accessible to government agencies and law enforcement. Like the CTA, the LLC Transparency Act (Legislation S.995B/A.3484) seeks to lift the veil of protection that private owners have exploited for years.
Individuals who create, or already have ownership interests in LLCs and meet the requirements for disclosure, will be required to identify the names of the beneficial owner(s) in the filing.
There are legitimate reasons for creating LLCs and using them in franchising. New York franchisors and franchisees who use LLCs to conduct the business of a franchise system or a franchise unit should speak with a NY franchise attorney to determine their reporting requirements and to establish appropriate procedures to ensure compliance with the state and federal transparency laws.
Lusthaus Law will continue to observe how these new laws impact clients and the franchising industry. The next Insight installment will provide additional relevant legislative updates affecting NY franchisors and franchisees.
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