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    The Business Lawyer

    Spring 2025 | Volume 80, Issue 2

    The CTA's "Inactive Entity" Exemption and Irrevocable Dissolution--"I'm Not Dead Yet"

    Thomas E. Rutledge and Robert R Keatinge

    Jun 13, 2025

    44 min read

    Banking Law Bankruptcy & Finance Bankruptcy Law Broker-Dealer Regulation Business Regulation & Regulated Industries Securities Law Securities Regulation

    Summary

    • Under the Corporate Transparency Act (the “CTA”) as enacted and as reflected in the Reporting Rules adopted in 2022, almost every LLC, corporation, and similar business organization in the United States is subject to beneficial ownership reporting requirements. A crucial mech­anism for ending those reporting requirements is the application of an exemption written for “inactive entities”; in operation this may (or at least was anticipated to be) the most commonly relied upon exemption. In 2024, FinCEN, via a series of FAQs, created an alternative mecha­nism of exempting a company from the CTA’s reporting obligations, an exemptive scheme that is especially important to non-U.S. organized ventures, they being largely excluded from the statutory/regulatory scheme. Herein we attempt to unravel the oft contradictory require­ments, concluding with a pair of hypothetical situations.
    The CTA's "Inactive Entity" Exemption and Irrevocable Dissolution--"I'm Not Dead Yet"
    iStock.com/Andrey Znamenskyi

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    The Corporate Transparency Act (the “CTA”) obligates almost every entity created or qualified to do business in the United States to file and continually maintain a report of certain personal identifying information of its “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury via its online Beneficial Ownership Secure System (“BOSS”). The CTA requires certain organizations (“reporting companies”) to file and update beneficial ownership information reports (“BOIRs”) at the time of formation (the “initial BOIR”) and each time any information reported on the initial BOIR changes (“updated BOIRs”). As discussed below, the burden of filing an initial BOIR is significant, but in many respects the burden of filing updated BOIRs may be even more burdensome as it requires the reporting company and its senior officers to monitor and report changes in information as to its beneficial owners over time. Thus, an organization should know when the updating obligation ceases. The CTA relieves the obligations of the reporting company and its senior officers from filing updated BOIRs after the reporting company has become exempt from the updating requirement and has filed a final updated BOIR indicating that it is now exempt from the reporting requirements. The statute, however, does not address the cessation of the reporting requirements when the organization ceases to exist as a legal entity upon termination. This Article considers when an organization ceases to have the obligation to file updated BOIRs because it either (1) benefits from the inactive entity exemption or, (2) even if it does not benefit from the inactive entity exemption, it has ceased to exist as a business organization under state law and no longer constitutes a “reporting company.”

    Within the reach of the CTA’s definition of a “reporting company” is any corporation (whether or not for profit), limited liability company (“LLC”), or any “similar entity” that does not qualify for any of twenty-three exemptions. Each reporting company must file initial and updated BOIRs identifying itself, its “beneficial owners,” and, for entities formed after January 1, 2024, its “company applicant[s].”

    Initially subject to these obligations is any entity “created” by a filing with a secretary of state or equivalent office (“reporting company”), except for any entity that meets any one of twenty-three exemptions (“exempt reporting company”). This Article focuses upon one of those twenty-three exemptions—the “inactive entity” exemption and whether an organization that has ceased to exist for purposes of state law has a continuing reporting obligation even if it does not qualify for the inactive entity exemption. Noteworthy for purposes of this discussion is that the definition of a reporting company makes no reference to commonly understood principles of legal organization law, such as “validly existing,” “in good standing,” “dissolution,” or “winding up and termination.” Moreover, while the CTA acknowledges that a reporting company may “terminate,” that term is not explained. Rather, the CTA imposes a series of limitations that are poorly defined, in some instances simply unattainable, and in all circumstances unnecessarily burdensome as legitimate companies wind up and terminate their operations. While relatively few operating companies will satisfy any of the twenty-three exemptions, most companies eventually terminate their operations and cease to exist. At that point, it seems rational to provide that the reporting obligations of the organization and its beneficial owners should also end. The CTA and its implementing regulations initially addressed the question of how a reporting company ends its reporting obligations through the inactive entity exemption, but as discussed herein, that exemption (particularly as amplified by the regulations) is almost entirely unworkable. In subsequent non-regulatory guidance, even FinCEN appears to recognize this problem, adopting distinct rules addressing “irrevocable dissolution,” a solution that, as discussed below, evinces FinCEN’s lack of understanding of the operation of business organizational law and terminology. We conclude that an entity that, as a matter of state law, ceased to exist is exempt from further reporting under the CTA in that it no longer constitutes a “reporting company.”

    This Article proceeds as follows: first, we review the law of the dissolution, winding up, and termination of organizations; second, we review the inactive entity exemption of the CTA; third, we review the regulatory guidance from FinCEN regarding the treatment of reporting companies that have “irrevocably dissolved” or terminated, including differences between the statutory and regulatory exemptions; fourth, we apply the inactive entity exemption and the FinCEN guidance in several basic hypothetical situations; and finally, we apply the exemption and guidance to two detailed scenarios.

    “Dissolved” Corporations and LLCs—“I’m Not Dead Yet”

    The inactive entity exemption typically applies when an otherwise regulated organization brings its operations to a final resolution, typically referred to as its dissolution, winding up, and termination. States address these processes in various organizational laws through which alternative standards, requirements, and effects are, to a greater or lesser degree, defined. Understanding the steps required by these statutes is crucial to understanding the difficulties of applying the inactive entity exemption. Unfortunately, the recently enacted CTA failed to coordinate with longstanding processes under state law.

    State statutes generally provide three bases upon which a corporation or an LLC may be dissolved and required to wind up its affairs—voluntary, judicial, and administrative. Voluntary dissolution ordinarily results from a provision in the organizational charter or by the consent of the owners or managers of the entity, as provided in its charter or by state statute. Involuntary dissolution of an entity may be imposed by the court in an action brought by an owner or state regulator for improper conduct or for failure to comply with state law. Whether the dissolution is voluntary or involuntary, the organization loses the capacity to engage in business in the ordinary course and must wind up or liquidate its affairs by marshalling its assets, discharging its obligations, and distributing any remaining assets to its owners in proportion to their interests. Some statutes allow an organization to rescind its dissolution and resume its existence as an organization in good standing. If the organization is not reinstated in this fashion, upon the completion of liquidation or winding up, the organization will be terminated and cease to exist.

    Administrative dissolution results from an organization’s failure to satisfy what is otherwise a ministerial duty, such as filing an annual or biannual report or paying an administrative tax. Most states establish a limited period within which a company may “cure” its administrative dissolution by making the required filings and sometimes by paying a “reinstatement fee.” Kentucky, Colorado, and a few other states allow for indefinite resurrection of a corporation or LLC that was administratively dissolved but not completely liquidated. Such resurrection proves handy if a voluntarily dissolved company is discovered to still have title to assets, or if management was unaware of the administrative failure that prompted the administrative dissolution.

    “Dissolution” emphatically is not the termination of the entities’ legal existence, but rather an alteration in its purpose. A “dissolved” entity is restricted to those activities necessary or appropriate to effect its winding up. It remains a corporation (or LLC); its shareholders (or members) continue to enjoy limited liability; it retains title to its assets; its registered agent remains in place; and it may sue or be sued. Many states permit or require that articles of dissolution be filed by the corporation or the LLC at the beginning of the dissolution process or at the conclusion of winding up. Neither organization makes a filing that the winding up and termination have been completed. In addition, there is the question of whether “dissolution” is complete prior to the filing of a final income or franchise tax return that reports the entity’s activities through the conclusion of the dissolution phase and at least tenders the calculated taxes that are due.

    States authorize voluntary dissolution via different mechanisms for different entities. States also differ in how voluntary dissolution is authorized and how (if at all) voluntary dissolution is made known in the public record. In the case of a corporation, if no directors have yet been appointed and if no shares have been issued or the corporation has not begun business, the incorporator may dissolve the corporation. Alternatively, if the directors have been appointed by the incorporator or were named in the articles of incorporation, the directors may cause the corporation’s dissolution. Notice of the dissolution is given by articles of dissolution that are filed with the appropriate state official. Alternatively, if the corporation has been in operation, the decision to dissolve is made by a majority of the shareholders acting upon a recommendation of the board of directors. There is, however, an important distinction regarding the articles of dissolution filed in these alternative instances. In the case of the articles of dissolution filed with respect to a company for which shares have not been issued or the corporation had not begun to operate, the articles require an affirmative statement “that no debt of the corporation remains unpaid,” which is made under penalty of perjury. If the corporation has been in operation, the articles of dissolution do not require any statement about corporate debt. Further, in that latter instance, it is anticipated that creditors, whether known or unknown, will be apprised of the corporation’s dissolution only after the articles of dissolution have been filed with the state.

    In nonprofit corporations, approval of a voluntary dissolution depends on whether the corporation has members who are entitled to vote on the question of dissolution. If members vote on dissolution, dissolution is approved by two-thirds of the members present at a meeting at which the question is considered, following a recommendation to dissolve by the board of directors. Alternatively, if the corporation does not have members or if the members are not entitled to vote on dissolution, the corporation’s dissolution may be approved by a majority of the board. For nonprofit corporations, there is no proviso for the dissolution by the incorporator, because the initial directors must be named in the articles of incorporation.

    There is an important distinction between the steps involved in the dissolution of business and nonprofit corporations. In the case of a business corporation: first, dissolution is approved; second, articles of dissolution are filed with the state; and third, upon the effective time and date of those articles of dissolution, the corporation is dissolved, whereupon its purpose is affected. For nonprofit corporations, the alternation of the purpose of the organization is effective immediately upon the decision to dissolve. For example, Kentucky provides as follows:

    Upon the adoption of such resolution by the members, or by the board of directors if there are no members or no members entitled to vote thereon, the corporation shall cease to conduct its affairs except insofar as may be necessary for the winding up thereof, shall immediately cause a notice of the proposed dissolution to be mailed to each known creditor of the corporation, and shall proceed to collect its assets and apply and distribute them as provided in KRS 273.161 to 273.390.

    The nonprofit corporation may thereafter file articles of dissolution, thereby placing third parties on notice of the dissolution, but that filing is not a precondition to the corporation entering into the winding up phase.

    For an LLC, dissolution must be approved by some or all of the members. Thereafter, the LLC files articles of dissolution, but the dissolution occurred upon approval by the members. The filing of the articles of dissolution merely notified third parties of the LLC’s dissolution.

    As detailed, states differ on the process to approve dissolution and to notice the public of any such dissolution. States, however, generally require the filing of a notice of dissolution to alert the public that the winding up process has begun, but states generally do not require a public filing that the dissolution and winding up processes have been completed.

    The Statutory Inactive Entity Exemption

    The CTA exempts from the obligation to file BOIRs any inactive entity, excluding them from the definition of a “reporting company,” if such entity meets the following requirements:

    any corporation, limited liability company, or other similar entity—

    (I) in existence for over 1 year;

    (II) that is not engaged in active business;

    (III) that is not owned, directly or indirectly, by a foreign person;

    (IV) that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000 (including all funds sent to or received from any source through a financial account or accounts in which the entity, or an affiliate of the entity, maintains an interest); and

    (V) that does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity.

    The Regulatory Inactive Entity Exemption

    The Reporting Rules, in furtherance of the CTA, exempt from the scope of a “reporting company”:

    Any entity that:

    (A) Was in existence on or before January 1, 2020;

    (B) Is not engaged in active business;

    (C) Is not owned by a foreign person, whether directly or indirectly, wholly or partially;

    (D) Has not experienced any change in ownership in the preceding twelve-month period;

    (E) Has not 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 of the entity had an interest, in the preceding twelve-month period; and

    (F) Does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

    Distinctions Between the Inactive Entity Exemptions of the CTA and the Reporting Rules

    There are a number of distinctions between the inactive entity exemptions set forth in the CTA and the Reporting Rules, as well as a number of common issues. Further, as will be discussed below, this exemption may, by negative inference, indicate that many entities which were thought to be “dissolved” constitute “reporting companies” subject to the CTA’s filing obligations. The following table breaks down the elements of the respective exemptions.

    Statutory Exemption Requirements 31 U.S.C. § 5336(a)(11)(B)(xxiii) Regulatory Exemption Requirements 31 C.F.R. § 1010.380(c)(2)(xxiii)
    In existence for over 1 year; Was in existence on or before January 1, 2020;
    Is not engaged in active business; Is not engaged in active business;
    Is not owned, directly or indirectly, by a foreign person; Is not owned by a foreign person, whether directly or indirectly, wholly or partially;
    Has not, in the preceding 12-month period, experienced a change in ownership; Has not experienced any change in ownership in the preceding twelve-month period;
    Has not, in the preceding 12-month period, . . . sent or received funds in an amount greater than $1,000 (including all funds sent to or received from any source through a financial account or accounts in which the entity, or an affiliate of the entity, maintains an interest); and Has not 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 of the entity had an interest, in the preceding twelve-month period; and
    Does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity. Does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

    Following the Supreme Court’s Loper Bright decision, agency regulations no longer command judicial deference. Loper Bright looms large because FinCEN’s regulations narrow the congressional exemption for inactive entities—limiting the exemption to organizations in existence on or before January 1, 2020—thereby increasing the number of organizations governed by the statute.

    Period of Existence

    It is clear that the regulatory exemption is more narrow and therefore more difficult to satisfy than is the statutory exemption, as the former would exclude from its scope any domestic reporting company created after January 1, 2020; the statutory exemption contains no such limitation. Presumably FinCEN took the “in existence for over 1 year” of the CTA, looked to the CTA’s effective date of January 1, 2021, and backed it off one year, thereby turning the statute’s more flexible floating date requirement to a fixed point in time under the regulations. This disparity raises an important question of whether the regulatory requirement is enforceable as a further limitation on the statutory exemption. While the CTA grants the Treasury Department the authority to create exemptions, the CTA does not empower the Treasury Department to limit the availability of a statutory exemption.

    In addition, the term “existence” is not defined. The term “existence” differs from the term “created,” which is used when determining whether a particular business organization is a “domestic reporting company.” It remains unclear why the Treasury Department employed different terms. The Reporting Regulations could have required that the entity had been “created not later than January 1, 2020” and could have obtained the same effect without adding yet another undefined term.

    Not Engaged in Active Business

    The term “active business” is not defined in either the CTA or the Reporting Rules. Presumably a business that is in the process of winding up and terminating its affairs, where its business activities are restricted to that purpose, is not engaged in an active business. A highly fact-specific issue concerns the distinction between “active business” and activities “appropriate to wind up and liquidate its business.” While the purchase of additional inventory for resale might not be part of a retailer’s winding up and liquidation, the purchase of additional mulch by a landscaping company to complete its last job (and to get paid thereon) might be.

    Further, neither the statute nor the regulations specify when this limitation should be assessed. Is it: (1) as of January 1, 2020; (2) as of January 1, 2024; (3) for the entire period January 1, 2020, through January 1, 2024; (4) for the entire period January 1, 2020, through December 31, 2024; or (5) as of some other date? Hopefully the answer is “some other date,” namely the date on which the entity determines it otherwise satisfies the requirements of the exemption, but FinCEN has not confirmed that interpretation.

    Not Owned by a Foreign Person

    First, the regulations define “foreign person” to mean “a person who is not a United States person.” In turn, the term “United States person” means:

    (A) a citizen or resident of the United States,

    (B) a domestic partnership,

    (C) a domestic corporation,

    (D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and

    (E) any trust if—

    • (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
    • (ii) one or more United States persons have the authority to control all substantial decisions of the trust.

    So, none of these “persons” is implicated by the exemption’s exclusion of entities with a foreign owner. That is easy for entities that never had an owner that is a “foreign person,” but what about a company desiring to be classified as an inactive entity that previously had such an owner? The exclusion from the exemption is for an entity that “is not” so owned, a phrase different from the “has not” so owned, which is elsewhere employed, indicating more of a point in time assessment. But at what point in time should this criterion be assessed? Is it: (1) as of January 1, 2020; (2) as of January 1, 2024; (3) at any time between January 1, 2020, and January 1, 2024; (4) at any time between January 1, 2020, and December 31, 2024; or (5) as of some other date? Hopefully the answer is “some other date,” namely the date on which the entity determines it otherwise satisfies the requirements of the exemption, but FinCEN has not confirmed that interpretation.

    Turning to the larger issue, what is meant by the undefined term “owned”? Is that single word shorthand for “beneficial owner,” such that the statutory and regulatory exemptions require that the entity “does not have a beneficial owner who is a foreign person, whether directly or indirectly, wholly or partially”? That seems a stretch. Moreover, “owned” is a verb that must be connected with something. The Reporting Rules provide a detailed definition of an “ownership interest,” but that term is not employed in the regulatory inactive entity exemption.

    No Change in Ownership in the Preceding Twelve Months

    Continuing the theme set forth above, neither the CTA nor the Reporting Rules defined the term “ownership.” Does the granting or termination of an out-of-the-money option constitute a “change in ownership”? While an option, even one that is out-of-the-money, is an “ownership interest” for purposes of the beneficial ownership tests, such an option does not, at the time of grant or at the time of termination, alter the percentage interests of the venture’s other “owners.” On these facts has there been a “change?”

    As was the case above, the phrase “in the preceding twelve-month period” is not anchored by a reference date. Is it: (1) the twelve months preceding January 1, 2020; (2) the twelve months preceding January 1, 2024; (3) the twelve months preceding January 1, 2025; (4) the twelve months preceding the date on which the entity determines it otherwise satisfies the requirements of the inactive entity exemption; or (5) from some other date? Hopefully the answer is option (4), but FinCEN has not confirmed that interpretation.

    Presumably an involuntary change in ownership, such as consequent to death, would render this exemption unavailable. Assume that Corp A existed for forty years with Sheldon as its sole shareholder, director, and officer. On December 31, 2023, Sheldon retired. During 2024, the corporation had been winding up and terminating its affairs. That process concluded on October 31, 2024, when Sheldon passed away in his sleep. Ignoring certain complications, it seems that Corp A must file an initial BOIR not later than January 1, 2025. Further, Corp A could not benefit from the inactive entity exemption until October 31, 2025. All of which seems to be an especially pointless application of the law.

    Another open question is whether the initial issuance of ownership rights constitutes a change in ownership. Assume a corporation was created under the Model Business Corporation Act (the “MBCA”) on day 1, 2024, by filing of the Articles of Incorporation with the state. On day 30, the incorporator appointed A, B, and C as directors, which board then issued shares to 1, 2, and 3. Before day 90, a BOIR was filed identifying each of A, B, C, 1, 2, and 3 as beneficial owners. No additional shares were ever issued, and no outstanding shares were transferred or redeemed. On day 366, after the corporation existed for at least a year, the board recommended, and the shareholders approved, the corporation’s dissolution, whereupon Articles of Dissolution were filed with the state. Was there a change in ownership in the twelve months preceding the filing of the Articles of Dissolution, or must that determination be made after day 395, more than twelve months from the initial (and only) share issuance? There is no authority to support the position that the share issuance is other than a change in ownership.

    Not Sent or Received More than $1,000 in the Preceding Twelve Months

    Returning to a theme in interpreting the inactive entity exemption, the phrase “in the preceding twelve-month period” is not anchored by a reference date. Is it: (1) the twelve months preceding January 1, 2020; (2) the twelve months preceding January 1, 2024; (3) the twelve months preceding January 1, 2025; (4) the twelve months preceding the date on which the entity determines it otherwise satisfies the requirements of the inactive entity exemption; or (5) from some other date? Hopefully the answer is option (4), but FinCEN has not confirmed that interpretation.

    Next, while transfers by an “affiliate” of the reporting company hoping to utilize the inactive entity exemption may be counted against it, the term “affiliate of an entity” is not defined. In other legal contexts, the federal government has defined “affiliate,” but neither the CTA nor the Reporting Rules define that term. Further, it is unclear how one should apply the language “through any financial account in which the entity or any affiliate of the entity had an interest.” Assuming affiliated companies use common accounts, at the inception of the dissolution process, must the dissolving company be barred from access to those accounts so as to avoid attribution of the ongoing activities of the other companies to the company undergoing dissolution to preserve availability of the exemption? Alternatively, should one focus exclusively upon transfers expressly on behalf of the dissolving venture? If the latter, what level of documentation of separation is necessary?

    Finally, the very act of analyzing the activities of the reporting company to determine its eligibility for the inactive entity exemption may entail costs of $1,000 or more, the payment of which by an “affiliate” may run afoul of this limitation.

    Holds No Assets

    The entity desiring to be classified as an “inactive entity” must not hold any “kind or type of asset,” including an “ownership interest” in another venture. While not express in the Reporting Rules, this limitation precludes a subsidiary of an inactive entity from claiming exemption from the CTA on the basis that its parent is exempt.

    It is unclear whether contingent assets or purely intangible assets, such as goodwill attached to a business name or website address, violates this limitation. The question was presented during the rule-making process, but FinCEN did not address the point in the Reporting Rules or in subsequent commentary. Any such assets—which are quite common—could render this exemption inapplicable. Is it FinCEN’s objective that a business organization must change its name and abandon any associated goodwill to take advantage of this exemption? Of course, such assets are not the only category that may give rise to problems. While winding up, many companies may be awaiting a tax refund or an advanced pricing agreement (“APA”) purchase price adjustment; whether the existence of these and similar claims will bar access to the inactive entity exemption has not yet been addressed.

    The Inactive Entity FAQs

    On July 8, 2024, FinCEN issued three Frequently Asked Questions (“FAQs”) that touch upon the application of the inactive entity exemption. Before turning to their substance, it is important to recognize that, while FinCEN stated that FAQs go through the same level of scrutiny as would a proposed amendment to the regulations promulgated by the Treasury Department, the guidance specifically stated, “[t]hese Frequently Asked Questions are explanatory only and do not supplement or modify any obligations imposed by statute or regulation.” As is identified below, these FAQs often tacitly ignore limitations imposed by the Reporting Rules and impose additional requirements upon reporting companies, including companies seeking classification as inactive entities. Though FinCEN may be estopped from disavowing its FAQs when pursuing an enforcement action against a company that relied thereon, such additional requirements further complicate matters for regulated companies and their attorneys.

    According to the first of the FAQs regarding the inactive entity exemption, reporting obligations are not applicable to what would otherwise be reporting companies that “ceased to exist as legal entities before January 1, 2024.” The second FAQ expands on the “ceased to exist” requirement:

    A company is not required to report its beneficial ownership information to FinCEN if it ceased to exist as a legal entity before January 1, 2024, meaning that it entirely completed the process of formally and irrevocably dissolving. A company that ceased to exist as a legal entity before the beneficial ownership information reporting requirements became effective January 1, 2024, was never subject to the reporting requirements and thus is not required to report its beneficial ownership information to FinCEN.

    Although state or Tribal law may vary, a company typically completes the process of formally and irrevocably dissolving by, for example, filing dissolution paperwork with its jurisdiction of creation or registration, receiving written confirmation of dissolution, paying related taxes or fees, ceasing to conduct any business, and winding up its affairs (e.g., fully liquidating itself and closing all bank accounts).

    The FAQ identifies facts that would indicate the reporting company remains subject to the reporting requirements:

    If a reporting company . . . continued to exist as a legal entity for any period of time on or after January 1, 2024 (i.e., did not entirely complete the process of formally and irrevocably dissolving before January 1, 2024), then it is required to report its beneficial ownership information to FinCEN, even if the company had wound up its affairs and ceased conducting business before January 1, 2024.

    Similarly, if a reporting company was created or registered on or after January 1, 2024, and subsequently ceased to exist, then it is required to report its beneficial ownership information to FinCEN—even if it ceased to exist before its initial beneficial ownership information report was due.

    The FAQ provided an example of when this relief from reporting is not available: “[a] company that is administratively dissolved or suspended—because, for example, it failed to pay a filing fee or comply with certain jurisdictional requirements—generally does not cease to exist as a legal entity unless the dissolution or suspension becomes permanent.” Then, undermining any supposed clarity, FinCEN stated: “[f]or specifics on how to determine when a company ceases to exist as a legal entity, consult the law of the jurisdiction in which the company was created or registered.” States, however, rarely provide that level of specificity in dissolution statutes. Dissolution is as much a status as it is a process, signaling to the world that the venture has ceased to do business in the ordinary course and has shifted to a purpose of winding up and terminating its affairs. After dissolution commences, typically by filing “articles of dissolution” with the pertinent state office, the dissolving organization remains a corporation or LLC; its shareholders or members continue to enjoy limited liability; it retains title to its assets; its registered agent remains in place; and it may sue or be sued. Thereafter, the entity must collect its assets, ascertain its liabilities, satisfy or make provision for those liabilities, and distribute any remainder to its owners. Even after dissolution is complete, absent resignation, the directors and officers remain directors and officers, with the analogous treatment for LLC managers, and the shareholders or members remain in that same role. There is not typically a filing with the state to the effect “dissolution is done, we are really finished.” In addition, there is the question of whether “dissolution” is complete prior to the filing of a tax return that reports the entity’s activities and at least tenders payment of any taxes due. Should completion of winding up be necessary before the obligation to submit and update BOIRs ends? FinCEN instructed: “[w]ith respect to questions regarding the treatment of company termination or dissolution, FinCEN does not expect a reporting company to file an updated report upon company termination or dissolution.” Dissolution typically happens by filing the “articles of dissolution” and typically long precedes the completion of the winding-up process. FinCEN arguably focused upon updated, and not initial, BOIRs, but then, could not a company already in dissolution file an initial BOIR and then make no further reports irrespective of when winding up is completed? Last, what is meant by “irrevocable?” Does “irrevocable” require that there be no state court mechanism by which assets discovered post-dissolution may be addressed?

    While the two FAQs referenced above apply to companies created prior to January 1, 2024, the third FAQ addresses companies formed on or after that date, which was the effective date of the Reporting Rules:

    These [reporting] obligations remain applicable to reporting companies that cease to exist as legal entities—meaning wound up their affairs, ceased conducting business, and entirely completed the process of formally and irrevocably dissolving—before the . . . reporting companies have to report their beneficial ownership information to FinCEN. If a reporting company files an initial beneficial ownership information report and then ceases to exist . . . , then there is no requirement for the reporting company to file an additional report with FinCEN noting that the company has ceased to exist.

    So, must a company created and dissolved in 2024 file a BOIR even if it no longer carries on business activities? How that will work is hard to ascertain. Assume a shell LLC is created on June 1, 2024, so it has ninety days to file its initial BOIR. But it is never used for anything by anyone. Nobody ever becomes a member, so the LLC never came into existence, as an LLC must have a member. How exactly is the LLC to file a BOIR? It never had a member and the organizer, unlike an incorporator, has no authority over the LLC after the moment of its formation. Being that there are no members, there is no actual or apparent agent for the company. No one has “substantial control” and, as there are no members, no one has any, much less 25 percent, ownership. A business organization is a legal construct, governed according to state law. This FAQ seems to assume that every organization engages in operations before entering the process of dissolution. This FAQ fails to address the treatment of an entity that was (partially) organized but then abandoned.

    Assuming a company was organized in 2024 or thereafter and engaged in some level of activity, which may be as little as transient usage in an exchange or acquisition transaction, it will need to file a BOIR even if it is wound up before the arrival of the BOIR reporting deadline. For entities created in 2024, the deadline is ninety days after notice of formation, a timeline that was be reduced to thirty days for entities organized on or after January 1, 2025. There may not be much to report. A BOIR needs to include information current as of the time the filing is made. Presumably any officer, director, or manager of a transient entity could resign from those positions before the reporting date and before the date upon which the entity otherwise ceases to exist, leaving the entity with no one to exercise managerial control. Likewise, any person or entity who was an owner could “resign” from being an owner, irrevocably forfeiting any such ownership rights, leaving the reporting company with no owners, much less owners with a 25 percent ownership interest. On those facts, the BOIR would identify the reporting company and the company applicant(s), but there would be no information provided as to beneficial owners, as none exist. Though the BOIR would be accurate, FinCEN’s BOSS would reject the filing as it lacks at least one beneficial owner, leaving reporting companies to navigate between the Scylla of the reporting deadline and the Charybdis of the requirement of completeness.

    Notwithstanding these significant issues, there is an overriding problem. The FAQ guidance is not integrated with the inactive entity exemption of the Reporting Rules. Two examples follow. First, with respect to FAQ C.13 and dissolution of entities completed before January 1, 2024, is it also necessary that the organization’s existence pre-dated January 1, 2020, and that there has been no change in ownership in the twelve months preceding its cessation of legal existence? Alternatively, is it sufficient the dissolution was completed before the effective date of the Reporting Rules? Second, with respect to FAQ C.14, if this is an explication of the inactive entity exemption, how can a company “created or registered in 2024” make use of an exemption limited by its express terms to a reporting company that “[w]as in existence on or before January 1, 2020”?

    But wait; there’s more. On September 10, 2024, FinCEN issued FAQs C.15 and C.16 and amended both C.14 and G.4. The amendments focus upon the information to report with respect to a company that has ceased to exist, requiring that the information be current as of the moment before existence ceased.

    The new guidance of FinCEN FAQ C.15 addresses persons that may act on behalf of a reporting company that has ceased to exist:

    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. . . . 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.

    Okay, the reporting company “should” take such actions, but it is not mandatory that the reporting company appoint a post-cessation agent to effect the filing. Moreover, it is debatable whether FinCEN may, in an FAQ, alter substantive state law (including the law of agency) to impose an obligation upon those who are overseeing its winding up to provide that someone will see to the filing of a BOIR that is not due until after operations have totally ceased. There is a fascinating question of whether and how a company can appoint a post-cessation agent, and a flip-side question of whether a company that has appointed such an agent and holds as a contract right the ability to insist upon her or his performance has truly ceased as described in FAQ C.14.

    FinCEN FAQ C.16 deals with foreign reporting companies, essentially extending the guidance of FAQs C.13 and C.14 to that category of reporting companies.

    Applying the CTA’s Inactive Entity Exemption

    A “reporting company” may be subject to the reporting requirements of the CTA even if not “validly existing,” not “in good standing,” or has been “dissolved.” It is clear that being “not validly existing,” “not in good standing,” or having been “dissolved” are insufficient standing alone to qualify for the inactive entity exemption. Irrespective of the ambiguities in applying the inactive entity exemption addressed above, the existence of the exemption indicates there are a class of entities “not engaged in active business” that still constitute “reporting companies” under the CTA.” As to this point, note than an entity that underwent dissolution is not exempt from complying with applicable law, including the federal obligation to file BOIRs.

    The critical question emerges: how does one identify an entity that is “not engaged in active business” but is still subject to the CTA’s reporting requirements and its penalty provisions? There is no easy answer to that question. The meaning of “existence” under the CTA is ambiguous. Also ambiguous is whether one can draw an equivalency between the CTA’s “not engaged in active business” and the state law formula “not carry on any business except that necessary to wind up and liquidate its business and affairs.”

    In the end, the guidance from FinCEN is not particularly helpful. The intent of the CTA and other anti-money laundering efforts and programs is to enable identification of the individuals who own and control business organizations that hold property or actively conduct businesses. Thus, the organizations with which FinCEN is concerned would be organizations that are legally competent to hold property and conduct business. An organization that has dissolved and is in the process of winding up may hold property and act, but only within a constrained limit—they may only conduct business, including the disposition of assets, consistent with its purpose of winding up the organization’s affairs. In this process, an individual must oversee the winding up of the organization and the organization may have other individuals with interests in any remaining assets. Any such individuals would probably exercise substantial control over the winding-up process, and individuals having sufficient interests in the organization may also be considered beneficial owners. To the extent that the individuals that exercised substantial control over the management of the business of the organization continue to manage the winding up, and the proportionate interests of the owners remain the same, the dissolution of an organization would not require an update to the organization’s BOIR as a result of dissolution. In some circumstances, such as the designation of a liquidating trustee or the shift in the proportionate interests in the organization, as might happen when distributions to preferred interest owners liquidate and terminate their interests, updated reports may be required during winding up. On the conclusion of winding up, when all assets have been marshalled, debts paid or provided for, and all of the remaining assets of the organization have been distributed, the authority of any individual heretofore having had direct or indirect control of the organization and any interest in the organization will be extinguished. At this point, the organization will be considered terminated and will no longer have the power to transact business or to hold property.

    For these reasons, it seems likely that the reporting obligations will continue until the organization has terminated as contemplated by state law. But even here, there are questions that need to be considered. Has the organization terminated if additional property or liabilities of the organization are subsequently discovered? Has the organization terminated if the organization created a liquidating trust or transferred assets to a state fund for any unidentified or unlocated owners? Outside of the CTA, the answers seem clear, but under the CTA the answers seem to be the reverse. If the organization is truly reinstated and carries on business, it would no longer be exempt. But is that treatment appropriate when addressing a forgotten asset for which disposition must be addressed? How does such treatment advance the policy goals of the CTA?

    Unlike the inactive entity exemption, which requires notification to FinCEN through the filing of an update to the previously filed BOIR and can take place only after specific timeframes have lapsed, the cessation of reporting obligations as a result of the termination of an organization does not require any notification to FinCEN.

    Ultimately, notwithstanding that the FAQs cannot alter the Reporting Rules and the FAQs are not coordinated with the Reporting Rules, the FAQs create a new path to escape treatment as a “reporting company.” Essentially, the approach set forth in FAQs C.12, C.13, C.14, C.15, and C.16 of an entity that “ceased to exist” excludes the entity from treatment as a “reporting company” as it “irrevocably dissolved” under applicable state law. Any such exclusion, however, is not based on the express terms of the statutory or regulatory inactive entity exemption. Under this paradigm, the term “irrevocably dissolved” should be applied at the point that the owners in good faith believe they have completed winding up, and, as a result no further updates (including an update reflecting the termination) need be filed, notwithstanding that, under state law, the resurrection of the entity for purposes of addressing an unknown asset or unknown liability is a possibility (however unlikely). As such, the “ceased to exist” analysis serves as an alternative exemptive path (the “Cessation Alternative”). While, as noted above, this discussion is focused upon “domestic reporting companies,” this alternative path to inactive entity status and relief from CTA BOIR updating obligations is crucial to foreign reporting companies in that most will have foreign owners and for that reason be perpetually barred (absent a transfer of ownership to either U.S. persons or to otherwise exempt reporting companies) from the statutory and regulatory inactive company exemptions, consigned to a perpetual limbo of having ceased all business activities but still required to file updated BOIRs.

    Application of These Rules to Hypothetical Facts

    Reporting Company Formed Before January 1, 2020, and Fully Dissolved, Wound-Up Before January 1, 2024

    This entity was never a reporting company as it ceased to exist before the initial effective date of the Reporting Rules. Note that the pertinent FAQs do not consider the entity transactions in the twelve months preceding December 31, 2023. No filing is required.

    Reporting Company Formed Between January 1, 2020, and January 1, 2024, and Fully Dissolved, Wound-Up Before January 1, 2024

    While this company is not able to avail itself of the regulatory exemption in that it was created after January 1, 2020, it may avail itself of the treatment provided for in FinCEN FAQs C.12 and C.13 to the effect it was never a “reporting company” in that it ceased to exist before the initial effective date of the Reporting Rules. Note that the pertinent FAQs do not consider the entity transactions in the twelve months preceding December 31, 2023. No filing is required.

    Reporting Company Formed Before January 1, 2020, Administratively Dissolved Under Applicable State Law, Period for Reinstatement Has Expired Before January 1, 2024

    In most circumstances, the administrative dissolution of a reporting company for failure to file administrative paperwork (such as an “annual report”) or to pay administrative taxes (which are typically nominal) is insufficient to bring a company under the inactive entity exemption as state law typically permits reinstatement of the company into good standing with little effort and expense. Under some state laws, there is an outer limit by which the reinstatement must be accomplished or the company’s administrative dissolution is not reversible. In that case, if the administrative dissolution became irrevocable before January 1, 2024, the organization was never a “reporting company” in that it ceased to exist before the initial effective date of the Reporting Rules. Note that the applicable FAQ does not consider entity transactions in the twelve months preceding December 31, 2023. No filing is required.

    Reporting Company Formed Before January 1, 2020, Administratively Dissolved Under Applicable State Law, Period for Reinstatement Has Not Run, Company Took No Steps to Dissolve and Wind Up

    A company that has undergone administrative dissolution and is still within the period within which it may be reinstated is typically not treated as having ceased its business activities, such that it may not avail itself of the Cessation Alternative as set forth in the related FAQs. If, however, all of the requirements of the statutory or regulatory inactive entity exemption were satisfied not later than December 31, 2023, then either exemption would be available to the subject company. Recall that formal dissolution under state law is not a precondition to the availability of inactive entity status. If that is the case, then the company is not a “reporting company” subject to the CTA’s reporting requirements, and no filing to that effect is necessary.

    Reporting Company Formed Before January 1, 2020, Administratively Dissolved Under Applicable State Law, Period for Reinstatement Has Not Run, Company Took Steps to Dissolve and Wind Up Before January 1, 2024

    A company that has undergone administrative dissolution and is still within the period within which it may be reinstated is typically not treated as having ceased its business activities, such that it may not avail itself of the inactive entity exemption, as set forth in the related FAQs. State law, however, may provide that, if the administratively dissolved entity proceeds to wind up its affairs and notifies creditors, the administrative dissolution is no longer subject to being set aside by reinstatement.

    On the assumption the controlling state law so provides, and further assuming that all other provisions of the statutory or the regulatory exemption are satisfied, the company may be classified as an inactive entity. If the requirements of either inactive entity exemption were satisfied not later than December 31, 2023, then the company was never a “reporting company” subject to the CTA’s reporting requirements, and no filing to that effect is necessary.

    Reporting Company Formed After January 1, 2020, and Before January 1, 2024, Administratively Dissolved Under Applicable State Law, Period for Reinstatement Has Not Run, Company Took Steps to Dissolve and Wind Up Before January 1, 2024

    A company that has undergone administrative dissolution and is still within the period within which it may be reinstated is typically not treated as having ceased its business activities, such that it may not avail itself of the inactive entity exemption, as set forth in the related FAQs. State law, however, may provide that, if the administratively dissolved entity proceeds to wind up its affairs and notifies creditors, the administrative dissolution is no longer subject to being set aside by reinstatement.

    On the assumption the controlling state law so provides, and further assuming that all other provisions of the statutory exemption are satisfied, the company may be classified as an inactive entity. If the requirements of either the statutory or regulatory inactive entity exemption were satisfied as of December 31, 2023, then the company was never a reporting company subject to the CTA’s reporting requirements, and no filing to that effect is necessary.

    If dissolution and winding up was not completed before January 1, 2024, the company must file an initial BOIR not later than January 1, 2025, and then file an update providing notice it is an inactive entity once the requirements for doing so have been satisfied.

    Reporting Company Formed After January 1, 2020, and Before January 1, 2024, that Dissolved in 2024 with Dissolution Completed Before January 1, 2025

    In that the reporting company was not in existence on or before January 1, 2020, the regulatory inactive entity exemption is not available, but its statutory counterpart remains available. In FinCEN’s view, having existed on January 1, 2024, the reporting company was obligated to file a BOIR not later than January 1, 2025, even if its winding up and termination was completed before January 1, 2025. However, the company may later amend its BOIR to indicate that it became an exempt inactive entity, after the necessary time requirements have lapsed, including that twelve months have passed since any change in ownership or any receipt or transmission of more than $1,000. During that time, the company will be obligated to keep its BOIR filing updated.

    Alternatively, if the company truly ceased to exist in 2024, it may avail itself of the Cessation Alternative, because, under state law, it has no jural existence.

    Business Corporation Incorporated After January 1, 2024, that Never Had Any Business Activities

    The fact that a corporation never engaged in any business operations does not exempt it from the obligation to file BOIRs pursuant to the CTA and the Reporting Rules. In FinCEN’s view, the obligation to file a BOIR accrued ninety days from notice of incorporation, if incorporated in 2024, and thirty days from such notice, if incorporated in 2025 or thereafter. BOIR will identify the company applicant(s) and the beneficial owner(s). If the directors were not appointed in the articles of incorporation and have not been named by the incorporator, then the incorporator will be the beneficial owner. Alternatively, if the directors were named in the articles of incorporation or the incorporator appointed one or more directors, then those directors generally constitute beneficial owners, whether or not there are shareholders. The CTA requires the company to keep its BOIR current until it has satisfied the requirements of the statutory inactive entity exemption including that it has existed for at least a year, at which time it can update its filing to indicate it is exempt from reporting. Alternatively, the corporation may rely on the Cessation Alternative if its requirements are met.

    LLC Organized After January 1, 2024, that Never Had Any Business Activities

    The fact that an LLC never engaged in business operations does not exempt it from the obligation to file BOIRs pursuant to the CTA and the Reporting Rules. In FinCEN’s view, the obligation to file a BOIR accrued ninety days from notice of formation, if organized in 2024, or thirty days from such notice, if organized in 2025 or thereafter. But, who files it and how is the filing accomplished? As noted previously, under many states’ LLC statutes, the organizer is not a member and has no power vis-a-vis the LLC once the formation takes place. Unlike a corporate incorporator, an LLC’s organizer does not have the authority to appoint managers or officers or to admit members to the company. While the LLC will have at least one company applicant, it will have no beneficial owners under either the substantial control test or the ownership test and likely will not have an employer identification number (“EIN”). So, the LLC lacks the information required to be disclosed in the LLC’s BOIR. Further, there is no person authorized to file the BOIR, and hence no person who can certify, on the LLC’s behalf, that the BOIR “is true, correct, and complete.” While FinCEN may contend that the LLC must file a BOIR, nothing in the CTA enables FinCEN to require a person to become a beneficial owner as either a member or a senior officer of the LLC or to alter substantive state LLC law by creating new organizational authority.

    Non-Exempt Reporting Company Created Before January 1, 2020, Dissolution Initiated and Completed During 2024

    This company may avail itself of both the statutory and regulatory inactive entity exemptions. The due date for its initial BOIR is not later than January 1, 2025, but we posit that all requirements of the statutory and regulatory inactive entity exemptions were satisfied before that date. In FinCEN’s view, this company’s obligation to file a BOIR accrued on January 1, 2024, with a due date of not later than January 1, 2025. Assuming that position to be accurate, the company may file a BOIR, and then, as soon as all of the terms of the statutory exemption have been satisfied (e.g., at least twelve months have passed since any change in ownership or any receipt or transmission of more than $1,000), then the company may file an updated BOIR to the effect it is now an exempt reporting company. Indeed it is possible that the two filings may be made back to back. Alternatively, if the reporting company truly ceased to exist in 2024, it may avail itself of the Cessation Alternative because, under state law, it had no jural existence.

    Non-Exempt Reporting Company Created After January 1, 2020, and Before January 1, 2024, Dissolution Initiated and Completed After January 1, 2024, Before First BOIR Deadline

    This company may avail itself of only the statutory inactive entity exemption; the regulatory exemption is not available because the company was created after January 1, 2020. The due date for its initial BOIR is not later than January 1, 2025, but we posit that all requirements of the statutory inactive entity exemption were satisfied before that date. In FinCEN’s view, this company’s obligation to file a BOIR accrued on January 1, 2024, with a due date of not later than January 1, 2025. Assuming that position to be accurate, the company may file a BOIR, and then, as soon as all of the terms of the statutory exemption have been satisfied (e.g., at least twelve months have passed since any change in ownership and any receipt or transmission of more than $1,000), the company may file an updated BOIR to the effect it is now an exempt reporting company. Indeed it is possible that the two filings may be made back to back. Alternatively, if the reporting company truly ceased to exist in 2024, it may avail itself of the Cessation Alternative because, under state law, it has no jural existence.

    A Pair of Case Studies

    Clearly the inactive entity exemptions are demanding, and it may be debated whether FinCEN, in FAQs C.12, C.13, and C.14, clarified the situation. The following two case studies afford some practical guidance regarding the rules as they exist as of February 1, 2025. In the first, we consider the transition of a Large Operating Company (“LOC”) through dissolution to the point where it is eligible for an inactive entity exemption. In the second, we consider a company that has elected to transition into an inactive entity exemption but later discovers that it still holds assets.

    Transitioning the LOC to an Inactive Entity

    Assume a corporation (the “Company”) was incorporated in an MBCA jurisdiction before January 1, 2020, and operated successfully. As of January 1, 2024, the Company satisfied all of the requirements for the LOC exemption from classification as a reporting company. Forty percent of the Company was owned by an ESOP Trust, for which a local bank serves as trustee, 40 percent by its founder Russ, and the balance by members of Russ’ family, including his son-in-law, Alexander. Unfortunately, on September 1, 2024, Russ tragically and suddenly passed away while celebrating the anniversary of the 1532 ascension of Anne Boleyn to the noble office of Marquess of Pembroke. The remaining directors met shortly thereafter and determined that the Company’s operations should be sold to NewCo, organized by Kamryn, who is Russ’s daughter and Alexander’s wife. Importantly, Alexander is not a U.S. citizen; he met Kamryn while she was studying in Ireland. Potential liabilities made a stock acquisition unappealing, so the parties negotiated an asset purchase agreement, which closed on November 1, 2024. NewCo hired the Company’s employees on the same terms.

    NewCo, an LLC organized on October 1 in anticipation of the closing, had ninety days from that date to file its initial BOIR. While NewCo anticipates qualifying as an LOC like the Company, it will not do so until it satisfies all three of the exemption’s requirements, including the filing of a tax return demonstrating revenue or sales of more than $5 million. It seems unlikely that NewCo would qualify for the LOC exemption for 2024, but it may after filing its 2025 return.

    Because the Company anticipated it would qualify for the LOC exemption for the foreseeable future, it had not considered CTA compliance. As of the closing on the sale to NewCo, the Company must commence compliance with the CTA. The Company lost all of its employees at the closing; the few officers who continue to oversee the Company’s winding up are far fewer than the LOC exemption’s minimum of twenty-one. So, generally within thirty days after failing to satisfy the requirements for the LOC exemption, the Company would file an initial BOIR. As it preexisted, the Reporting Regulation’s initial effective date is January 1, 2024; however, the Company is afforded more than thirty days to file its initial BOIR. In that the ESOP Trust stills owns 40 percent of the Company’s stock, its trustee must be reported as a beneficial owner. The balance of the beneficial owners, including the Company’s “senior officers,” must also be reported. The Company must establish a system for tracking information as to itself and its beneficial owners to update its initial BOIR, as required by the CTA and the Reporting Rules. In addition, the Company cannot satisfy the requirements of the inactive entity exemption, which include the requirement that no owner be a “foreign person, whether directly or indirectly, wholly or partially.” Alexander is a foreign person. Consequently, the Company redeemed Alexander’s ownership interests for a nominal payment of $10.00; that redemption was effective as of December 31, 2024. On January 1, 2025, the Company filed articles of dissolution with the secretary of state and sent notice to those few creditors whose obligations were not assumed by NewCo. Under state law, those creditors have ninety days to present their claims. By April 15, 2025, NewCo resolved its creditors’ claims, organized an irrevocable liquidating trust to hold certain insurance that addresses certain potential legacy claims and cash estimated to cover the costs of the trust’s administration, distributed the net proceeds from the asset sale to its shareholders, including an estimate of the expenses to be incurred by the ESOP in its winding up, and filed final tax returns with payment of all amounts calculated as being due. That day, all of the corporate directors and officers resigned, save Reagan, one of Russ’ daughters, who was long involved in the Company’s management. Reagan will serve as the Company’s sole director and officer.

    As of April 15, 2025:

    • • The Company was not engaged in an active business;
    • • The Company filed articles of dissolution and proceeded, as dictated by state law, through the process of winding up and dissolution; and
    • • The Company was not owned by a foreign person.

    However:

    • • The Company had a change in ownership on December 31, 2024, in connection with Alexander’s redemption; and
    • •The Company transmitted more than $1,000 on April 15, 2025.

    Assuming no additional facts, the Company must maintain its BOIRs through April 15, 2026. As of April 15, 2026, the Company may amend its BOIR to indicate it became exempt from the CTA’s reporting obligations. However, if the Company receives a federal or state tax refund or other funds, the twelve-month period may be reset as of the day of receipt, extending the period that the Company remains subject to CTA reporting. Further, the Company must consider whether the dissolution of the ESOP Trust upon the distribution of the sale proceeds to the plan participants is another change in ownership that resets the twelve-month period.

    The Inactive Entity that Discovers It Has Assets

    Returning to the principle that business organizations are legal constructs, one formula is that any such organization is a “rights holding vehicle.” Unlike natural persons, the rights afforded a particular organization are defined by state law, and typically include the right to enter contracts and to hold property in its name. Those rights are not eliminated by dissolution but are prospectively curtailed. To the extent the organization has unknown rights—such as the right to recover financial assets that escheated to the state—the right to those assets continues unimpaired notwithstanding dissolution. Consider, for example, corporate funds totaling $7700 that, for whatever reason, were escheated to a foreign state, unbeknownst to the corporation or its managers. The corporation dissolved, gave notice to creditors, collected and liquidated its known assets, paid off creditors, distributed any remainder to the shareholders as residual claimants, and, after applicable periods had run, filed a BOIR update that it qualified for the inactive entity exemption.

    When the foreign state sends the corporation notice of the escheated funds, all would agree that such funds constitute a corporate asset. One would expect the corporation to recover the escheated funds and distribute them accordingly. If the creditors had not been paid in full, the creditors rightly expect the corporation to recover and distribute the escheated funds to them to reduce any losses. Irrespective of “dissolution” and what is believed to be a final settling of accounts, there remains the faintest flame by which the corporation’s existence may be fanned back to full strength in order to collect the escheated funds that are its property. Assuming that, during dissolution, all directors and officers resigned and a liquidating trust was not set-up, the shareholders must elect a board, which must appoint an officer to recover the escheated funds and distribute them accordingly. This scenario presents questions regarding the CTA.

    First, do those facts preclude the company from successfully asserting that it ceased to exist as a legal entity? Certainly that cannot be the case or FinCEN’s FAQs would have little, if any, application. Second, must the company, upon learning of the escheated funds, immediately file an amended BOIR, in effect forfeiting the previously claimed inactive entity exemption, which exemption is not available if the reporting company has “any” assets? Under a strict reading of the CTA and the Reporting Rules, neither the statutory exemption nor the regulation exemption is available. Woe to the attorney who must advise the company and its constituents. Third, in recovering and distributing the escheated funds, must the company reset the twelve-month waiting period, given its receipt and transmission of more than $1,000? If so, the company must file updated BOIRs for another year, before qualifying for the inactive entity exemption.

    ********

    The statutory and regulatory inactive entity exemptions are, at best, confusing and, for most organizations, entirely ineffective at addressing the conclusion of organizational existence. FinCEN’s attempt to address organizational termination through its FAQs regarding “irrevocable dissolution” contributes to the uncertainty. Unfortunately, Congress and the Treasury Department failed to craft relatively straightforward rules building upon accepted principles of business entity law and tied to generally applicable statutory language. The requirement to continue as a reporting company a year after completing the winding-up process creates an ouroboros for compliance. Companies will incur additional costs when winding up without benefit to creditors or residual owners. Attorneys will face exasperated clients when explaining the generally inexplicable burdens imposed by the CTA.

    A Post-Script: The Current Status of the CTA

    As of March 11, 2025, the status of the Corporate Transparency Act is as confusing as is its treatment of “inactive” and former entities. And for the same reason. The CTA reflects the attempt by people without a background in the history of organizations before the current era to reshape organizational law for purposes and uses unrelated to those for which such organizations were created and have evolved. Unsurprisingly, this attempt to federalize and deputize the law and tradition under which millions of organizational associations have been formed has met with a significant resistance from the economic community affected. As a result, the reactions from all three branches of government have been inconsistent and contradictory, and, as of this writing, there is serious question as to the extent, if any, that the CTA will apply to United States business organizations. Even if the CTA ultimately becomes irrelevant with respect to United States organizations or “beneficial owners” (however defined) who are U.S. citizens, a more rational system designed to identify the beneficial owners of organizations will need to address organizations that have ceased to exist, thereby implicating the determination of the beginning and end of organizational existence. These existential issues are both complex and subtle, and the efforts to address them to date do not provide comfort that the necessary knowledge base has been brought to bear in the process of developing the related Reporting Rules. We hope this Article will help either those authors or those succeeding them to address these important issues more rationally and effectively than has been done to date.

      Authors