Dead Or Alive: Dissolved Entity Reporting Requirements
“There’s a big difference between mostly dead and all dead. Mostly dead is slightly alive.”
- Miracle Max, The Princess Bride
Recently, the Financial Crimes Enforcement Network (“FinCEN”) released additional guidance regarding reporting requirements for dissolved entities under the Corporate Transparency Act (the “CTA”).
Prior to the additional guidance, it was unclear whether dissolved entities were required to submit initial beneficial ownership reports if they were dissolved prior to the reporting due date (given that, after dissolution, such entity would no longer have any owners). However, FinCEN’s most recent guidance holds that only those entities that have “entirely completed the process of formally and irrevocably dissolving” (e.g., fully liquidated itself and closed all bank accounts) before January 1, 2024, are not required to file a beneficial ownership report given that, because they ceased to exist when the CTA took effect, they do not constitute a “reporting company” and are not subject to the reporting requirements thereunder.
In short, if a reporting company continued to exist as a legal entity for any period of time on or after January 1, 2024, even if the entity is subsequently dissolved before the relevant beneficial ownership report is due, then it is required to file a beneficial ownership information report as dictated under the CTA, unless it otherwise meets one of the 23 exemptions (such as the “inactive entity” exemption discussed below).
What is the CTA and who is affected?
By way of a brief refresher, the CTA was passed as a part of the Anti-Money Laundering Act of 2020 and it authorized FinCEN to create a federal framework for collecting beneficial ownership information of reporting companies.
Under the CTA, any entity formed by filing documentation with a secretary of state’s office, including corporations and limited liability companies, is considered a “reporting company.” Any reporting company that existed prior to January 1, 2024, is required to file its initial beneficial ownership information report by January 1, 2025, and any reporting company formed during 2024 has 90 days to file its initial beneficial ownership information report (with such timeframe decreasing to 30 days for any reporting company formed in 2025 and beyond).
The CTA provides for 23 exceptions from the reporting requirements, including exemptions for certain regulated entities subject to similar reporting requirements (e.g., banks, investment advisors, publicly traded entities, etc.), certain tax-exempt entities, “large operating entities” (entities with more than 20 full-time employees that have filed federal tax returns demonstrating more than $5 million in revenue) and “inactive entities”.
Dissolved Entities and Inactive Exemption.
According to the recent guidance, an entity is required to be “formally and irrevocably” dissolved prior to January 1, 2024 in order to avoid reporting obligations, which means that the entity must have filed voluntary dissolution paperwork, received written confirmation of dissolution, and have wound up its affairs completely, including fully liquidating itself and closing all of its bank accounts. Anything short of this formal and irrevocable dissolution will not be sufficient. For example, administrative dissolutions resulting from a failure to file a biennial report are not sufficient to avoid reporting requirements since the affected entity could be reinstated upon the filing of a biennial report.
With that being said, an entity (regardless of its dissolution status or timing thereof) will be exempt from the reporting requirements if it meets the “inactive entity” exemption. In order to qualify as “inactive” an entity must:
1. Have been in existence on or before January 1, 2020;
2. Not be engaged in active business;
3. Not be owned by a foreign person, directly or indirectly;
4. Not had a change in ownership in the preceding twelve months;
5. Not have sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate had interest, in the preceding twelve months; and
6. Not have ownership in any kind of asset, including any ownership interest in another entity.
Unfortunately, this exception is extremely narrow, given that an “inactive” entity must meet all of the above requirements. Furthermore, the exemption isn’t necessarily intuitive, given that many entities which are no longer considered “active” by their owners may not qualify as “inactive” under the CTA.
Conclusion
FinCEN’s recent guidance makes clear that, those entities that may be considered “mostly dead” by their owners will be considered as “slightly alive” by FinCEN and be required to submit beneficial ownership information reports as required under the CTA, unless they meet the “inactive entity” or other exemption.
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