By Linda R. Brower, Senior Counsel, Commercial Transactions
As we have turned the page on summer and now make a mad dash through fall, the first major deadline under the Corporate Transparency Act (the Act) since its effective date (January 1, 2024), is quickly approaching: Companies subject to the Act and formed or registered prior to and still in existence on January 1, 2024, have until December 31, 2024, to file an initial report under the Act. The Act requires “reporting companies,” to file with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) information about the company and the individuals in “substantial control,” or that own 25 percent or more, of the equity unless an exemption applies. Disclosures under the Act are aimed at combatting financial crimes.
Reflecting on just a few of the many important questions related to the Act that have been raised by our clients since the Act’s implementation earlier this year, the question whether, if at all, and when, a reporting company has to file an initial report and under what circumstances it has to report changes in its ownership structure, up to and including the point of formally and irrevocably dissolving, is at the top of the list.
Because knowing the correct answer to these questions ensures that reporting companies avoid liability under civil fines and possible criminal imprisonment, we have created a two-part guide. In Part 1, we examine the filing requirements for an initial report and update reports for Pre-2024 reporting companies. In Part 2, the filing requirements for initial and update reports for 2024 and Post-2024 reporting companies are addressed, and so is FinCEN’s attempt to clarify what “changes” to a reporting company’s ownership trigger the filing of an update report.
What was clear prior to September 2024 about the filing requirements for Pre-2024 reporting companies.
With respect to filing initial reports. The Act mandates that a reporting company formed or registered on or before December 31, 2023, and in existence on January 1, 2024, is required to file its initial report any time on or before the December 31, 2024, reporting deadline. This is true no matter what — even if the company subsequently (on or after January 1, 2024) ceases to exist as a legal entity before December 31, 2024, or otherwise alters its ownership structure (as would a transitory entity only formed to facilitate a merger or other liquidation event). FinCEN FAQ C.12, C.13 (issued July 8, 2024).
Related to the first point, according to the Act, a company never becomes a reporting company, and is not required to file an initial report, if it ceases to exist as a legal entity on or before December 31, 2023. Pursuant to FinCEN guidance issued in mid-summer 2024 we knew that the term “ceased to exist” has a special meaning. FinCEN guidance made clear that a reporting company “ceases to exist” only after all the following occurs: it winds up its affairs (i.e., closes all bank accounts and fully liquidates its business), ceases to conduct business, and “entirely complete[s] the process of formally and irrevocably dissolving.” FinCEN FAQ C.13 issued July 8, 2024.
To meet the third requirement, the company must have complied with the state laws in which it was formed or registered by having filed for and received confirmation of dissolution (usually after payment of all final fees and taxes). An “administrative” suspension or dissolution that the states sometimes issue because a company failed to pay a filing or annual report fee do not satisfy the high standard that is needed for a company to complete the “formal and irrevocable dissolution” process.
With respect to filing update reports. Before September 2024, FinCEN guidance clarified that “any change” to previously-filed required information must be updated no later than 30 days after the date the change occurred. FinCEN’s Small Entity Compliance Guide, December 2023, Chapter 6.1 at page 45 (the Compliance Report). The Compliance Report provided examples of what constitutes changed information. FinCEN also added, without explanation, in a nondescript “Note” that “[t]here is no requirement to report a company’s termination or dissolution.” Compliance Report at page 46. So, as a result, we know that the “ultimate” kind of “change” –termination or dissolution — is exempt from filing an update report. To be clear, there is no place on the official FinCEN form to even report a company’s dissolution or termination.
After the July 8, 2024, FinCEN guidance, however, we were left hanging whether FinCEN considered the “termination or dissolution” standard referred to in the Compliance Report to be the equivalent of a reporting company having “ceased to exist.” On September 10, 2024, FinCEN issued additional guidance on this issue. This issue and others are addressed in Part 2.
If you have any questions regarding how this new FinCEN guidance affects your reporting compliance obligations, please contact the author or another member of the Corporate Group at Brown, Moskowitz & Kallen, P.C.