As of January 1, 2024, the implementation of the Corporate Transparency Act (CTA) has ushered in significant changes aimed at enhancing transparency in corporate structures across the United States. This new law requires nearly all businesses in the U.S. to report their “beneficial owners” to the Treasury. The penalty for willful noncompliance is $500/day up to $10,000 per year.

There are 23 categories of businesses that are exempt from filing, and this article will tackle Exemption 23, regarding Inactive Businesses. Generally, a business is inactive if it is no longer conducting business or is closed. However, the CTA may force millions of small business owners to dig for their old LLC documents unless Exemption 23 applies.

Exemption 23 is as follows:

"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 12-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.[Emphasis added.]"

The single most important word here is “and” because it means that “inactive” businesses must meet all of the requirements to avoid filing a BOI report.

Breaking the exemption into it’s individual parts:

(A) Existence on or before January 1, 2020: Entities claiming exemption must have been established on or prior to January 1, 2020, ensuring that newer entities are subject to the reporting requirements.

(B) Not engaged in active business: Exempt entities should not be actively conducting business operations, distinguishing them from active commercial entities subject to disclosure.

(C) Not owned by a foreign person: The entity, directly or indirectly, wholly or partially, cannot be owned by a foreign individual or entity.

(D) No change in ownership in the preceding twelve-month period: Stability in ownership is a crucial criterion, necessitating no changes in ownership within the preceding year.

(E) No significant financial transactions: Exempt entities must not have sent or received funds exceeding $1,000 in the previous twelve-month period, whether directly or through financial accounts linked to the entity or its affiliates.

(F) Absence of assets: The entity should not hold any assets, including ownership interests in other entities, whether within the United States or abroad.

It's important for entities seeking exemption under these criteria to meticulously assess their status against each criterion to ensure compliance. Failing to meet any one of these conditions could result in exclusion from Exemption 23 and necessitate compliance with the reporting requirements of the Corporate Transparency Act.

Since the law is (as of this writing) brand new, there are several live legal questions which will need to be answered in the coming months. However, as the law currently stands, people with businesses that have been inactive since January 2, 2020 will likely need to file BOI reports for every old LLC, corporation, or other entity registered with the Secretary of State (or equivalent) of your jurisdiction.

Determining which business entities are required to report to the Treasury can be a complicated exercise. A tax attorney at Safeguard Law, PLLC would be happy to assist you.