BUSINESSES DEAD & GONE: MAYBE NOT FOR LONG UNDER THE CTA

Under the federal Corporate Transparency Act (“CTA”) most businesses (i.e., corporations, limited liability companies, limited partnerships, and any other entities that are created by the filing of a document with a secretary of state or any similar office) (each a “Reporting Company”) are subject to the CTA and its Beneficial Ownership Information (“BOI”) filing requirements with the Financial Crimes Enforcement Network (“FinCEN”), unless the business meets any of the CTA’s 23 exemptions criteria.

But what of businesses dead and gone;                                                               

Whether remembered or forgotten.

For many of those, it’s a brand new dawn.

And the CTA’s not issuing a pardon!!!

Requirements for “Death”

For a business that otherwise would qualify as a Reporting Company under the CTA, its “death” and the date thereof must meet specific CTA requirements.  Otherwise, it is a Reporting Company, at least for the initial reporting of BOI to FinCEN, due on or before December 31, 2024.

Establishing the “death” of a nonexempt Reporting Company to FinCEN’s satisfaction requires a multi-factored analysis.  First, merely closing its doors and ceasing all business activities, is not enough. That might make the business an “inactive” Reporting Company, which if, and only if, that Reporting Company was formed prior to January 1, 2020, might qualify for the CTA’s “Inactive Entity Exemption.”

In order for FinCEN to accept the “death” of a Reporting Company, that company “must have  completed the process of formerly and irrevocably dissolving.”  Moreover, even if an entity has been dissolved under state law, the law of its state may provide that the entity continues in existence for the purposes of winding up its affairs, including resolution of claims and litigation, selling its assets, paying its debts, filing tax returns or making other governmental filings, and closing its bank accounts, among other items.  Maryland and Pennsylvania law so provide.  In that situation, FinCEN states the initial BOI filing requirements still apply.

Additionally, Reporting Companies might be administratively dissolved by their organizing jurisdictions because they failed to file annual reports, pay required fees, or satisfy other administrative requirements.  Maryland and Pennsylvania are such jurisdictions.  Although those entities may not exist for company state law purposes, under the CTA they continue to exist until the revocation of authority has become permanent.  To determine whether the dissolution or revocation is permanent, state law must be checked to see if the entity can “cure” or reinstate its existence. Maryland and Pennsylvania laws allow such “cures.”  Therefore, FinCEN instructs the initial BOI filing requirements still apply.

Another area impacted by the CTA’s guidance on dissolved entities is mergers and acquisitions (“M&A transactions”), where entities (called “merger subsidiaries”) are created to facilitate a merger.  Such merger subsidiaries would still have to comply with the BOI filing requirements even though they are merged out of existence prior to the deadline for their initial BOI reports of their formation. FinCEN’s guidance clarifies that, as of January 1, 2024, nonexempt, non-surviving merger subsidiaries must file a BOI report regardless of when they merge out of existence.

In its Frequently Asked Questions (“FAQs”), FinCEN states that the CTA general reporting deadlines (which are different depending on when the entity is created or registered) apply to entities that have ceased to exist. Therefore, a nonexempt Reporting Company intending to dissolve and cease to exist might consider filing its BOI report prior to its dissolution so that it timely meets its BOI reporting requirements.  In that regard, FinCEN has confirmed in its FAQs that if a nonexempt reporting company timely (relative to its date of formation) files its initial BOI report prior to ceasing to exist, no additional report would need to be filed with FinCEN to notify it that such company has ceased to exist.

Additionally, however, businesses should continue to monitor any changes in company or beneficial owner information that are required to be reported to FinCEN prior to the entity ceasing to exist.

Timing of “Death”

FinCEN has clarified in the CTA FAQs that if a Reporting Company has fully completed its dissolution, liquidation, and wind-up of affairs before January 1, 2024, it is outside the scope of the CTA and need not file a BOI report. As described above, FinCEN requires a company to have fully completed the process of dissolving.

Thus, beneficial owners who may have chosen simply to cease all business operations and ignore formal notices from their state administrative agency (i) to file annual reports, and/or (ii) that the company is no longer in good standing, and/or (iii) the company’s charter or other formation document is forfeited, but do not formally take necessary steps under the operative state law to fully complete the defunct company’s dissolution, liquidation, and wind-up process, whether prior to or after January 1, 2024, and therefore mistakenly believe no CTA BOI filing applies to such company, do so at their own peril because the CTA has substantial criminal and civil penalties.

As a result, beneficial owners who thought their defunct, but not fully dissolved companies, formed prior to January 1, 2024 were “dead” may be surprised to learn that those companies are considered to be “alive” for CTA purposes.  Even if most of the events necessary to fully dissolve the defunct company occurred prior to January 1, 2024, if any requirement remains on or after that date, the initial CTA BOI filing requirement must occur prior to January 1, 2025.  If full dissolution occurs in calendar year 2024, the beneficial owner must file its initial CTA BOI report within 90 days of receiving  actual or public notice of the dissolution.

For a merger subsidiary formed in calendar year 2024 that will not survive the merger transaction, whether within or after a 90-day period from its formation, that merger subsidiary must file its initial CTA BOI report within 90 days of the date of its formation.  Thereafter, the merger subsidiary need not file a report of its demise to FinCEN.

For merger subsidiaries or any other nonexempt reporting company formed on or after January 1, 2025 that ceases its existence, whether planned or unplanned, the initial CTA BOI filing requirements must be satisfied within 30 days of its formation.  Thereafter, the merger subsidiary or unplanned defunct entity need not file a report of its demise to FinCEN.

Miscellaneous Matters

For merger transactions, or other planned dissolutions of nonexempt reporting companies, extreme caution should be exercised regarding CTA BOI filing deadlines. If the intent is to file the initial BOI report for the merger subsidiary or planned demise entity as part of the merger completion or dissolution process, delays to the closing of the merger or planned entity dissolution that would cause the 90-day window (for 2024 formation entities) or 30-day window (for 2025 and beyond formation entities) for filing the initial CTA BOI report of entity formation to be inadvertently missed.  This may result in severe civil and/or criminal penalties.

Another problem for entities that no longer exist but are subject to CTA BOI filing requirements is determining the point in time that should be reflected in the BOI report. Generally, CTA BOI reports are required to reflect current information as of the time of filing. If the reporting entity intends to dissolve and files its BOI report prior to ceasing to exist, it should report information that exists at the time of filing.  However, if it files the BOI report after it has completed dissolution and no longer exists, it should report the BOI information existing immediately before the entity ceased to exist since that would be as close to current information as possible. However, this assumes that no material time elapsed between the dissolution and the actual filing of the initial BOI report, and that no changes in the entity occurred that would require a separate CTA filing.

Finally, if a CTA BOI report must be filed for a dissolved entity, the question arises who would be authorized to file it.  FinCEN has answered this question in C.15 of its FAQs:

“Who may file a BOI report on behalf of a reporting company created or registered in 2024 or later that ceases to exist before its initial BOI report is due to FinCEN?

Anyone whom a reporting company authorizes to act on its behalf—such as an employee, owner, or third-party service provider—may file a BOI report on the reporting company’s behalf, even after the reporting company ceases to exist (see Question B.8). Thus, if a reporting company will cease to exist before the expiration of the 30- or 90-day period reporting companies have to report their beneficial  ownership information to FinCEN, then it should make arrangements while it exists to have the report submitted on its behalf, even if the requisite filing does not occur until after the reporting company ceases to exist. Regardless, the BOI report must be filed by the time such report is due to FinCEN (see Question C.14).”

If you have any questions, please contact Keith Clark (kclark@shumakerwilliams.com); Martin B. Ellis (mellis@shumakerwilliams.com); or Summer Pannizzo (spannizzo@shumakerwilliams.com), or contact us at www.shumakerwilliams.com.

This article was written by Martin B. Ellis, Esq. For more information regarding the BOI filing requirements under the Corporate Transparency Act, see Marty’s previous post on this issue here.

The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.