What it means for the sale of your company
The new year brings in new laws affecting business owners nationwide. We like to watch for laws affecting our business owner clients and ensure we understand their potential impact on M&A transactions. One law that will affect small business owners going forward and comes with stiff penalties for non-compliance is the Corporate Transparency Act. To better understand its impact, we consulted with Ken August, Founder and president of August Law Group, a full-service business law firm based in Irvine, CA. Ken provided the following insights into this relatively new law.
What is the Corporate Transparency Act?
The Corporate Transparency Act, 31 U.S.C. §5336 (the “CTA“) is a United States Federal law passed by Congress in 2021 as part of the National Defense Authorization Act. The CTA was enacted as a part of the United States’ efforts to combat money laundering, tax fraud, corporate corruption, and the financing of terrorism. It is required to be complied with equally by US citizens and residents, as well as all foreign nationals who own corporate interests in the United States.
The CTA requires most corporations, limited liability companies, general and limited partnerships, and other forms of business organizations that are organized, registered, or qualified to do business in or from the United States (including both foreign and domestic companies) to file reports with the Financial Crimes Enforcement Network (“FinCEN“) identifying all of the true beneficial owners of those entities. This broadly covers almost every business operating in or from the United States, including entities with only one or a few equity owners.
The purpose of the CTA is to develop a singular, comprehensive database to be maintained by FinCEN, and containing all required Beneficial Ownership Information (“BOI”) of a domestic or foreign business that is organized and existing under the laws of any State of the United States, or which is a foreign business qualified to conduct business in or from any State (each such business, a “Filer”).
When to File
For Filers formed or qualified before December 31, 2023, their initial Report to FinCEN containing all required BOI must be received by FinCEN by January 1, 2025.
All Filers which become formed or qualified between January 1, 2024 and December 31, 2024, must file within ninety (90) calendar days after the date such entity was created or registered to do business in any State.
All other entities covered by the CTA and formed or qualified on any date from and after January 1, 2025, must file their report with FinCEN within thirty (30) calendar days after such entity was created or registered to do business in any State.
After a Filer has filed its initial report, they must file updates reflecting any changes in the filed information within thirty (30) calendar days after the date of such changes (such as for one example only, if a Beneficial Owner transfers its ownership in a company to another person).
While there are twenty-three exemptions to the filing requirements provided by the CTA, they are very narrow, and careful attention must be paid on a case-by-case basis before any entity should rely on them. Any company exempt under the CTA does not have to make filings with, nor provide their BOI to, FinCEN. Examples of companies that are exempt from filing include companies registered with the US Securities and Exchange Commission, tax-exempt entities, entities that are already reporting beneficial ownership information to FinCEN, and other regulated entities, such as certain financial institutions, insurance companies, securities brokers, dealers, venture capital companies.
Penalties for Failure to File
Any company that fails to file its required reports to FinCEN timely are subject to significant penalties, including civil and criminal penalties. Civil penalties can be up to $500 per violation per day. Criminal penalties can include fines of up to $10,000, and imprisonment of up to 2 years.
Impact on M&A Transactions
For people engaged in M&A transactions and corporate investments generally, the CTA will have a significant impact in two important areas: company due diligence and the Representations and Warranties section in the applicable purchase and sale agreement.
Because of the liability that the owners of companies can be exposed to under the CTA, persons desiring to acquire an interest in the equity of a company (whether for complete acquisition or partial investment) will want to make sure that the target company has timely complied in full with all of the requirements of the CTA, and that it is not subject to civil or criminal penalties for failing to do so.
Accordingly, those responsible for conducting due diligence on a target company will want to add to their checklists confirmation of delivery to, and receipt by, FinCEN of all required filings, including the initial BOI and all subsequent corrections and updates, and to check those filings against the target’s company records reflecting the beneficial ownership of the company.
Similarly, in the definitive agreement embodying the terms and conditions of a proposed acquisition of, or investment in, a target company, the section setting forth the Representations and Warranties of the target should now contain a specific representation that the company has made all filings with FinCEN required by the Corporate Transparency Act as currently in effect. All such filings have been made on time, and the information contained in such filings is true, correct, and complete, without limitation as to the company’s beneficial owners.
If you have any further questions about the CTA or need assistance with staying in compliance, feel free to contact Ken August directly at kaugust@augustlawgroup.com.
