Complying With the Corporate Transparency Act in Buying a Business

The Corporate Transparency Act (CTA), which took effect in 2024, represents a significant shift in the regulatory landscape for businesses in the United States. Its primary aim is to curb illicit activities by enhancing the transparency of business ownership. The requires beneficial owners of certain U.S. and foreign entities to file identifying information with the Financial Crimes Enforcement Network (FinCEN). The implications of the CTA are particularly pertinent during the purchase or sale of business equity.

The general purpose of the CTA is to deter and prevent money laundering, terrorist financing, and other illicit financial activities by creating a more transparent corporate structure that reveals the individuals who own or control significant aspects of businesses. By mandating the disclosure of beneficial owners, the act seeks to peel back the layers of anonymity that can shield wrongful acts behind corporate veils.

Under the CTA, reporting requirements are triggered when forming a new entity or when there is a change in beneficial ownership, which includes buying or selling equity in a business. Beneficial ownership information (“BOI”) reporting must include the full legal names, birthdates, addresses and unique identifying numbers from an acceptable identification document for each beneficial owner. This information must be submitted at the time of formation and updated within 30 days of any change in ownership.

Noncompliance with the CTA can lead to severe penalties, impacting both the buyer and the seller in a transaction. These can include fines of $500 for each day a violation continues, up to a total maximum of $10,000. A violator can also face imprisonment for up to two years. 

Since the buyer of a reporting company faces prolonged exposure to penalties for pre-existing CTA violations, several precautionary steps are advisable to mitigate the risks. These include the following: 

1. A buyer should conduct due diligence to make sure the BOI is current and accurate before acquisition. This involves having the seller verify the information reported and confirm that all necessary disclosures have been made under the CTA.
2. A buyer should insist that sellers provide representations and warranties concerning compliance with the CTA and the accuracy of the submitted BOI.
3. A buyer should request documents that demonstrate the seller’s compliance with the CTA. Discovering any non-compliance before finalizing the transaction can prevent future legal complications, fines, or business disruptions.
4. After the acquisition, a buyer must ensure that the business continues to meet all reporting requirements of the CTA. This includes updating the BOI report for the acquired entity within 30 calendar days of the transaction.

In transactions involving the formation of new entities, both buyers and sellers must be cognizant of the CTA’s requirements. Timely filing of the initial and any subsequent BOI reports is essential.

In view of the legal ramifications involved, parties involved in the purchase or sale of business equity should seek capable business compliance legal counsel, who can ensure accurate preparation and timely submission of BOI reports and analyzing any continuing reporting needs.

The Law Offices of Donald W. Hudspeth P.C., located in Phoenix, Arizona, focuses on business law and can provide the necessary expertise to navigate the intricacies of the CTA, ensuring that all transactions are compliant and that the interests of the business are safeguarded. Call us at 866-696-2033 or contact us online to schedule a consultation.