Filing Requirements Under the Corporate Transparency Act: The Problem of “Eternal Entities”

The Corporate Transparency Act (“CTA”) requires most entities to file with the Financial Crime Enforcement Network (“FinCEN”) Beneficial Ownership Information (“BOI”) about those who own and/or control the entity, unless the entity is exempt under the CTA from doing so. There are both civil and criminal penalties for failure to comply. Of course that filing requirement does not apply to entities that do not exist. But what, according to the CTA and FinCEN interpretive guidance, is the filing obligation of an entity that has ceased to operate? Although it seems logical that any filing requirement that applied to an entity while it was operating would no longer apply, that is NOT necessarily correct. The issue involved is – does the cessation of operations equal the termination of existence?

FinCEN anticipated this question when, on July 8, 2024, it issued Frequently Asked Questions C-13 (“Is a company required to report its beneficial ownership information to FinCEN if the company ceased to exist before reporting requirements went into effect on Jan. 1, 2024?”) and C-14 (“If a reporting company created or registered in 2024 or later winds up its affairs and ceases to exist before its initial BOI report is due to FinCEN, is the company still required to submit that initial report?”). FinCEN instructs that an entity formed before  Jan. 1, 2024, that otherwise would be required to file BOI, need not do so IF the entity “ceased to exist” before  Jan. 1, 2024.

As Question C-13 points out, an entity ceases to exist only IF “it entirely completed the process of formally and irrevocably dissolving,” which are matters governed by state law. That phrase contains 2 key points.  First, the process of dissolving MUST be entirely completed. Almost all state corporate statutes, the state-enacted versions of the Uniform Limited Partnership Act, and the Limited Liability Company acts provide for extended periods to wind up a “dissolved” entity. The entity typically still has officers, general partners, or managers to act for it, and powers to settle claims and to distribute any net assets to owners (shareholders – both preferred and common; or to members, as the case may be). Indeed, the Model Business Corporation Act contains essentially the same provisions.  Second, the “entirely completed” process of dissolving MUST be “irrevocable.” Many state business entity statutes, and especially Limited Liability Company acts (probably to preserve favorable tax treatment when a “dissolution” is reconsidered), contain express provisions allowing the “reinstatement” of the administratively dissolved entity, usually without any time limit. As a result, the dissolution of an entity governed by such a statute is NEVER final, but has “eternal life” in the view of FinCEN.

At first glance, it appears that any entity in existence before Jan. 1, 2024, is required to file BOI even if the entity has no assets, management, operations, or even tax filings. However, Exemption 23 under the CTA frees an “inactive entity” from compliance with the BOI filing requirements IF:

1. a) it was in existence before Jan. 1, 2020;
2. b) it is not engaged in active business;
3. c) it is not owned by a foreign person;
4. d) it has not had a change of ownership in the prior 12 months;
5. e) it has not sent or received any amount greater than $1,000 directly or through any financial account; and
6. f) it does not otherwise hold assets of any kind in the U.S. or abroad, including any interest in another entity.

The CTA should supersede the guidance in Question C-13, but the implicit contradictions between state statutes under which entities are formed and the apparent inflexible guidance of Question C-13 call for FinCEN to revise Question C-13 to avoid unintentional violations. Further, the reasons for Exemption 23 do not end after Jan. 1, 2024. Question C-13 should be revised to clarify when an entity may lawfully cease to be a “Reporting Company” independent of provisions in the state law under which it is organized, i.e., when it becomes an “inactive entity” (even though the entity was not in existence before Jan. 1, 2020). Question C-14 extends that guidance to newly-formed entities (i.e., formed in 2024) that must file their BOI within 90 days of formation, even if the entities are formally dissolved in less than  90 days or are dissolved on or before Dec. 31, 2024. Once again, those entities may turn out to be “eternal,” absent guidance that allows them to be classified as “inactive entities” (although not existing prior to Jan. 1, 2020).

Without a 50-state survey, it is impossible to identify a state whose business entity statutes lack the typical provisions about dissolution and reinstatement. But it is  possible to confirm that in 2022, Pennsylvania amended its Business Corporation Law to provide that if a domestic filing entity has failed to make a required annual report and has been dissolved or terminated, it has the opportunity for reinstatement with no limitation on the period of time for such reinstatement.

Also, New Jersey’s Business Corporation Act, Uniform Limited Partnership Law, and Revised Uniform Limited Liability Company Act contain extended winding-up requirements after dissolution. The state’s Business Corporation Act allows for revocation of dissolution if sought within 60 days of the effective date of dissolution, and its Revised Uniform Limited Liability Act contains a reinstatement provision without a time limit.

Further, the New York Business Corporation Law provides the typical dissolution and winding-up provisions (including, to the extent assets have not been distributed within 6 months of dissolution, an express direction that they escheat to the state), and a provision without time limit allowing  application to a Court to “suspend or annul” dissolution. Both New York’s Limited Liability Law and its Limited Partnership Law allow for a winding-up period after dissolution, but contain no provisions authorizing reinstatement.

In addition, relying on commentary from members of the American Bar Association’s Business Law Section’s Limited Liability Company, Partnership, and Unincorporated Entity (“LPUE”) Committee (of which Peter D. Hutcheon is a long-time member), it appears that Delaware, Arizona, California, Colorado, Illinois, and Massachusetts have provisions akin to New Jersey’s.

Business attorneys at Norris McLaughlin, P.A., are equipped to assist financial institutions in analyzing their obligations under the CTA and the requirements regarding access to BOI for businesses and beneficial owners failing to report. You may also contact John F. Lushis, Jr. at jlushis@norris-law.com.