Is Your Business an “Inactive Entity” Under the CTA?

Introduction to the Corporate Transparency Act

The Corporate Transparency Act (CTA) introduces new reporting requirements for many U.S.-based companies. A domestic entity, typically created by filing a document with a secretary of state or similar office, is one type of reporting company affected by these requirements. Compliance with these rules is crucial, as non-compliance can result in significant penalties. But does your business qualify as an “inactive entity” under the CTA’s exemptions? Let’s break it down with an illustrative example.

The Case of Sam and Ricardo

Sam was a young man who began investing in stocks early in life. As his portfolio grew, he became concerned about protecting his investments from lawsuits. In 2021, Sam formed a Wyoming LLC to safeguard his assets.

In 2023, Sam’s friend Ricardo, a Spanish citizen, joined the LLC by contributing $5,000 in stocks for a 30% ownership interest. Ricardo, being from a foreign country, added complexity to their reporting obligations. This partnership brought unintended consequences.

When the CTA took effect in 2024, Sam and Ricardo failed to report their Wyoming LLC to the Financial Crimes Enforcement Network (FinCEN). As a result, they were fined $10,000. Their Wyoming LLC, classified as a reporting company, did not qualify for the “inactive entities” exemption and was required to disclose beneficial ownership information. Additionally, their LLC had not ceased to exist before the reporting requirements took effect, which is why they were fined. Sam and Ricardo also failed to complete the necessary filing dissolution paperwork to formally dissolve their LLC.

What Are “Inactive Entities”?

The CTA requires companies to report information about their business and “beneficial owners” to FinCEN. However, it provides 23 exemptions, including the “inactive entities” exemption. To qualify, a company must meet all of the following criteria:

Formation Date: Formed before January 1, 2020. The process a company typically completes for dissolution includes filing paperwork and receiving confirmation.
Business Activity: Not engaged in active business. The dissolution process may vary depending on state or tribal law.
Foreign Ownership: No ownership held by a foreign person.
Ownership Changes: No change in ownership within the last 12 months.
Financial Activity: Has not sent or received funds exceeding $1,000 within the last 12 months.
Assets: Does not hold any assets.

Companies that have completely wound up their affairs and ceased conducting business before the reporting requirements took effect are not required to report.

Companies must go through the process of formally and irrevocably dissolving to qualify for the exemption.

If even one criterion is not met, the business does not qualify as an “inactive entity” and must report to FinCEN. Even if a company does not meet all criteria, it still has reporting obligations to FinCEN.

Application to Sam and Ricardo’s Limited Liability Company

Sam’s Wyoming LLC failed to meet the “inactive entity” requirements:

It was formed in 2021 (after January 1, 2020). As a reporting company, it must file its beneficial ownership information. Even if the reporting company ceases to exist before the reporting deadline, it must still file its beneficial ownership information.
Ricardo, a foreign citizen, acquired a 30% interest.
The LLC held $5,000 in stocks as assets.

While the LLC was not engaged in active business, this single argument was insufficient because all other criteria were unmet. Consequently, the LLC was required to report its beneficial ownership information.

Shell companies are often scrutinized under the CTA to prevent illicit activities.

Business entities like Sam’s LLC must comply with reporting requirements if they do not meet the exemption criteria.

Understanding Beneficial Ownership Information Requirements

A “beneficial owner” is someone who:

Owns at least 25% of the company, or
Exercises “substantial control” over the company.

Companies must submit their initial beneficial ownership information to FinCEN. Even if a company ceases to exist before the report is due, it is still required to submit the initial BOI report.

Beneficial owners may have interests in multiple entities, which must be reported.

In Sam and Ricardo’s case, both qualified as beneficial owners—Sam owned 70%, and Ricardo owned 30%. Therefore, both were required to report their beneficial ownership information, including identification documents, to FinCEN.

Initial beneficial ownership reports are crucial for compliance with the CTA.

Consequences of Non-Compliance for a Reporting Company

Non-compliance with the CTA can result in:

Financial Penalties: Fines up to $10,000. Domestic entities must comply with reporting obligations to avoid penalties. The obligations remain applicable to reporting companies even if they cease to exist before their initial beneficial ownership report is due.
Reputational Damage: Loss of credibility within the business community. Any business entity failing to comply with the CTA faces reputational damage.

These consequences highlight the importance of understanding and adhering to the CTA’s reporting requirements. Companies must report their beneficial ownership information within a specified timeframe after receiving public notice of their creation or registration.

Best Practices for Compliance

To ensure compliance with the CTA, consider the following steps:

Review Ownership Structure: Regularly assess your company’s ownership to identify beneficial owners. Exempt entities must still review their status regularly to ensure compliance.
Implement Record-Keeping Systems: Maintain accurate and up-to-date records of ownership and control changes. Maintaining accurate records is crucial for filing beneficial ownership information reports.
Timely Reporting: File beneficial ownership information with FinCEN promptly. Domestic entities must file their beneficial ownership information promptly to avoid penalties.
Seek Professional Guidance: Consult qualified attorneys or accountants to navigate complex requirements. Ensure that all necessary steps, including paying the filing fee, are completed for the formal dissolution process.

Additional Resources

Here are some resources to help you comply with the CTA:

FAQs on the Corporate Transparency Act: Covers key aspects of the law, including who needs to report and deadlines.
Guide to Beneficial Ownership Reporting: A step-by-step walkthrough of filing requirements.
Corporate Direct’s Compliance Services: Professional assistance to help businesses meet CTA obligations.
Closing all bank accounts is a necessary step in the dissolution process.
It is essential to receive written confirmation of the dissolution to avoid reporting obligations.
A company must cease to exist as a legal entity to avoid reporting requirements.
Paying related taxes is part of the formal dissolution process.

Conclusion

Understanding whether your business qualifies as an “inactive entity” under the CTA is essential to avoid penalties. If your business does not meet all the criteria for exemption, it must comply with the reporting requirements. Don’t leave compliance to chance—consult with experts to ensure your business stays on the right side of the law.

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