Key Considerations for BOI Reporting During Entity Transitions

Disclaimer: As of December 26th, 2024, the CTA reporting requirements are not enforceable due to a preliminary injunction. The information in this article does not include considerations regarding the preliminary injunction. Entities formed while the injunction is in place should be prepared to file reports immediately if/when the injunction is lifted (if the 30-day period has elapsed).

The Corporate Transparency Act (CTA) mandates the reporting of beneficial ownership information (BOI) for certain legal entities beginning in 2024. When altering the structure or jurisdiction of an entity—such as through dissolution and re-formation, merger, conversion, or adding registration jurisdictions, understanding how these changes affect BOI reporting obligations is critical. Below, we explore considerations for each type of transition.

Dissolution of an Entity in One Jurisdiction and Formation in Another Jurisdiction

Dissolving an entity in one jurisdiction and forming a new one in another is a comprehensive process involving liquidation, settling of liabilities, any other wrap up requirements needed to meet dissolution requirements. There could be various, major federal and state tax items to consider. The new entity that is formed in the other jurisdiction may also need a new Employer Identification Number (EIN), contributing to the reason that it will be a separate BOI reporting entity and would be considered a newly formed entity.

For BOI reporting purposes, if the original entity is fully dissolved before the CTA’s effective date (January 1, 2024), it may have no BOI reporting obligations. However, if the dissolution occurs after the effective date, an initial BOI report should be filed since the entity will still be subject to reporting requirements (See FAQ C.13 from FinCEN). Although, subsequent updates to the entity BOI may not be applicable if the entity no longer exists. This leaves the possibility of two BOI reports needing to be filed even though the intention was for the new one to replace the other.

While this method is an option, the associated costs and administrative burden are significant due to the need to transfer assets, comply with dissolution procedures, and possibly file an additional BOI report if the dissolution of the original entity is not formally completed or was done in 2024.

Merger of Entities

In a merger, one entity becomes the surviving entity while the other ceases to exist. This statutory transaction simplifies asset and liability transfers. The CTA implications are that the surviving entity would be the one that must file a BOI report reflecting its beneficial ownership. The non-surviving entity generally does not retain a separate reporting obligation, since it is no longer a legal entity. However, it is important to consider when the merger occurs. If it occurred after the CTA effective date of January 1, 2024, the non-surviving entity may still need to file an initial report since it met reporting obligations (FAQ C.13). The report would reflect the beneficial owners right before the merger occurred. After the merger, it would no longer be a legal entity, so any subsequent updated reports would not be required for that non-surviving entity.

Now, if both BOI Reports have been filed already and they undergo a merger, what entity is responsible for maintaining updated information with FinCEN? Given that the surviving entity is the only entity that remains legally in existence if the merger is executed correctly, it should be updated for any changes to beneficial ownership information because of the merger. Presumably, the other entity is no longer subject to reporting requirements and wouldn’t need to file any updated reports because of the merger since it ceases to exist at the end.

Statutory Conversion or Domestication

A statutory conversion (or domestication) is a seamless method for changing an entity’s formation state where it is authorized to conduct business. Typically, no separate BOI report is required for the entity as it exists after the conversion because the entity remains the same legal entity, just in a new jurisdiction. Some states don’t have these transactions available and may vary so it is important to ensure that no entity remains in the original jurisdiction to avoid unintended reporting obligations or compliance issues.

While a whole new initial BOI report may not be applicable, it will be important to update the existing BOI report for the entity to reflect the new “jurisdiction of formation”. Additionally, if the conversion required a change in the legal name—perhaps because the current name was not available in the new state—this does not automatically mean there is a need for a new BOI report. However, an updated report should be filed to reflect the change in legal name to ensure compliance with FinCEN requirements. Remember, updates to Beneficial Ownership Information are required to be filed within 30 days of a change.

Another common example that would result in the need for an updated BOI Report to be filed is upon the conversion from an LLC to a corporation, or vice versa. Given that in these conversions the legal name of the entities change – My Company, LLC to My Company, Inc., an updated report should be filed to reflect the new name (FAQ C.18).

Registration in Additional Jurisdictions

Registering an entity in a new jurisdiction while maintaining its original formation state is another aspect of compliance to consider. Per FinCEN’s FAQs, no additional BOI report is required for adding a registration in another jurisdiction if the original registration stays intact. If the entity subsequently dissolves in its original formation state, an updated BOI report must be filed to reflect the change in formation jurisdiction.

If the entity operates under the same EIN and name in both jurisdictions, it is typically treated as one entity. If a different name is required in the new jurisdiction, this alternative name should be included in the BOI report as equivalent to a DBA or trade name. Ultimately, there may be no resulting BOI reporting obligations when adding a jurisdiction. However, if it needs to be registered under a different name than its legal company name, an updated report will need to be filed within 30 days of the registration including that alternative name.

Evaluate BOI Reporting

Restructuring an entity—whether through dissolution and reformation, merger, conversion, or adding jurisdictions—is a common practice that allows businesses to adapt to changing needs. However, with the introduction of new BOI reporting obligations under the Corporate Transparency Act, it is key to evaluate how such transitions will affect reporting requirements.

By planning carefully, consulting with legal and tax professionals, and considering state-specific guidance, which can vary widely, entities can navigate these transitions effectively. A proactive approach ensures that restructuring decisions align with both business objectives and regulatory compliance.

Disclaimer: This blog article is intended for informational purposes only and does not constitute legal advice.  For advice on specific legal issues, please consult with a qualified attorney.

Considerations for Beneficial Owners Reaching the Age of Majority Requirement Under the CTA

(As of December 26th, 2024, the CTA reporting requirements are not enforceable due to a preliminary injunction. This article does not address details about the preliminary injunction and is intended solely to continue presenting and discussing reporting considerations under the CTA.)

As businesses navigate their reporting obligations under the Corporate Transparency Act (CTA), an important consideration is the age of majority requirement for beneficial owners. If a beneficial owner is a minor at the time of filing and a parent or guardian’s information was used in place of the minor’s, the business must update its filing when the minor reaches the age of majority, as defined by the laws of the state in which the entity is formed.

Below, we outline the key points your clients should consider when dealing with minor beneficial owners and the age of majority requirement.

Understanding the Age of Majority Requirement

In the context of the CTA, if a minor beneficial owner (as defined by the laws of the entity’s state of formation) reaches the age of majority, and previously a parent or guardian’s information was used in place of the minor’s, an updated report must be filed to list the individual’s information. It’s important to note that the reporting requirement is tied to the state of formation of the entity, not necessarily the state where the minor resides.

For example, if a business is incorporated in a state where the legal age of majority is 18, but the minor beneficial owner lives in a state where the legal age of majority is 21, the business must file an updated report when the individual turns 18, as per the state of formation’s law.

Why This Matters

The key takeaway is that businesses must remain aware of any minor beneficial owners and track when they reach the age of majority in the state of formation. Failing to file an updated report promptly after the individual reaches the age of majority could result in non-compliance with CTA reporting requirements.

Age of Majority by State

Since the age of majority laws vary by state, businesses must understand the specific laws that apply to their state of formation. Below is a breakdown of the age of majority for various states:

  • 18 Years Old: AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MO, MT, NE, NV, NH, NJ, NM, NY, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI, WY
  • 19 Years Old: AL, NE
  • 21 Years Old: MS

This list is important to cross-check as the age of majority laws may change. Businesses and professionals should reference this information when setting reminders for any updated reports required as a result of a minor coming of age.

Disclaimer: This article is intended for informational purposes only and does not constitute legal advice. For advice on specific legal issues, consult with a qualified attorney. 

How to Report DBAs for BOI Reporting

When filing your Beneficial Ownership Information (BOI) report under the Corporate Transparency Act (CTA), it’s essential to account for all “Doing Business As” (DBA) or trade names your entity operates under. Understanding DBAs for BOI reporting accurately could avoid compliance issues, so it’s important to understand what a DBA is, why entities use them, and how to ensure proper reporting. 

What is a DBA, and Why Do Entities Use Them?

A DBA allows a business to operate under a different name, without creating a new legal entity. For example, if John Smith owns a sole proprietorship named “John Smith Enterprises” but wants to operate under the name “Smith Consulting,” he would file a DBA in his state jurisdiction. Businesses adopt DBAs for several reasons, such as: 

  • Branding: To create a unique identity for a product line or service. 
  • Market Differentiation: To appeal to a specific audience or industry segment. 
  • Legal Protection: To ensure all business activities are legally recognized under the new name. 

The process for filing a DBA varies by state, county, and city. Start by checking with your local county clerk’s office, state government website, or a professional legal advisor to understand the specific requirements in your area. 

Identifying DBAs for BOI Reporting

For purposes of the CTA, it is important to understand that DBAs that need to be reported may not be ones that are officially registered with the Secretary of State. Owners should evaluate alternative names used while conducting business even without a formal filing with the state. 

Renewing or Removing DBAs

DBAs are not perpetual and must be renewed periodically, often every five years, but it depends on local laws. The renewal process is similar to the initial filing and ensures that the DBA remains active and legally recognized. If a DBA is not renewed or the business stops using it, you may want to update your BOI report to reflect the change. This ensures the accuracy of your filings and aligns with ongoing compliance obligations. 

Don’t Overlook Reporting a DBA or Alternate Name

As the year-end deadline for millions of BOI reports approaches, it’s easy to overlook the need to report DBAs on the form. However, including all active trade names is an equally important part of your compliance obligations. Take the time to review your business’s operations, identify all DBAs, and ensure they are accurately reflected in your BOI report. 

 

What is the Inactive Entity Exemption? A Deep Dive!

The Corporate Transparency Act (CTA) introduced new reporting requirements to enhance transparency and combat illicit activities. However, not all entities are subject to the required reporting. One of the exemptions that is important to understand is the “inactive entity” exemption. In this blog, we’ll take a deep dive into what the inactive entity exemption entails, who qualifies, and the implications for businesses. 

What is the Inactive Entity Exemption?

The inactive entity exemption is designed for entities that are not actively conducting business or holding any assets. Therefore, it is not a structure that would harbor the illicit activities that they are aiming to uncover. An entity will qualify for this exemption if it meets all the following criteria: 

  1. The entity must not be engaged in any active business. 
  2. The entity must not hold any assets, including banks accounts, real estate, or interest in other entities. 
  3. There must have been no change in the ownership structure in the last 12 months. 
  4. It has not sent or received over $1,000 of funds in the last 12 months. 
  5. It was in existence on or before January 1, 2020. 
  6. It is not owned by any foreign persons, directly or indirectly.  

Entities that qualify for this exemption are not required to file BOI reports with FinCEN, thus reducing their regulatory burden. 

Potential Risks and Considerations

While the inactive entity exemption offers the benefit of less reporting, entities should be aware of potential risks and considerations: 

  1. Accurate Documentation: It is critical to maintain accurate and thorough documentation to support the claim of being an inactive entity. Inaccurate or incomplete records could lead to compliance issues if audited by FinCEN. 
  2. Changes in Status: If an entity’s status changes and it no longer qualifies for the exemption, it must begin filing BOI reports within 30 days of losing exempt status to remain compliant with the CTA. 
  3. Legal Consultation: Entities should consult with legal and compliance professionals to ensure they meet all criteria for the exemption and maintain appropriate documentation. 
  4. Entities Not Planning to be Used: If the entity is wrapped up apart from formally filing for dissolution, the entity owner may consider formally dissolving the entity. If the entity was formed in 2021 or later but meets all other criteria of the exemption it would also be in a great position to be formally dissolved. An initial BOI report would still need to be filed, but after dissolution with the state, the entity would not be required to file any updates since it no longer legally exists.

Conclusion

The inactive entity exemption under the CTA provides valuable relief for entities that are not being used and are otherwise completely dormant. By understanding the criteria and maintaining accurate documentation, qualifying entities can benefit from reduced compliance burdens. For more information on the CTA and BOI reporting requirements, visit our related articles: 

Obtaining EINs for Single-Owner Disregarded LLCs to Enhance Privacy

With the upcoming deadline for millions of Beneficial Ownership Information (BOI) reporting requirements, getting an Employer Identification Number (EIN) for your single-member, disregarded LLC is a proactive step to enhance privacy and reduce the risks associated with reporting a Social Security Number (SSN) as the entities tax ID number.

While using an SSN may be practical for many single-member LLCs in the past for other obligations, BOI reporting could introduce new privacy concerns. Here’s why obtaining EINs for single-owner disregarded LLCs can be a smart choice to protect personal information in this evolving regulatory landscape. 

The Privacy Risks of BOI Reporting

For years, single-member LLCs classified as disregarded entities for tax purposes could use the owner’s SSN (or an EIN if owned by another entity) on tax forms and financial documents. However, the BOI reporting requirement, which mandates that entities report their beneficial owners FinCEN, introduces additional privacy considerations. This new federal database could potentially face issues, including database breakdowns or data breaches, especially during the peak filing period at year-end when millions of entities submit reports. 

Relying on your SSN for BOI reporting in this new system could be risky, as it exposes your most sensitive personal information to potential leaks. Using an EIN instead of an SSN could limit the exposure of your SSN and enhance your privacy protection. 

Benefits of Using an EIN for BOI Reporting

  1. Enhanced Privacy and Security

An EIN protects your SSN from being entered into the FinCEN database. As the EIN is tied to your business, it creates a layer of separation between personal and business information, reducing the risk of identity theft if any information gets exposed. 

  1. Lower Risk During High-Volume Reporting

With millions of entities expected to file BOI reports at year-end, FinCEN’s database could face scaling issues, as this new system likely hasn’t been fully tested under such heavy demand. Using an EIN minimizes the risk of your personal SSN being caught up in potential system glitches, data breaches, or other issues. 

  1. Compliance with Evolving Regulations

As privacy regulations expand, having an EIN could make compliance with future requirements easier for single-member LLCs. 

How to Obtain an EIN for Your Single-Member LLC

Obtaining an EIN is simple, and the process can be completed online through the IRS in a few minutes. Here’s a quick guide: 

  1. Determine Eligibility: You must have a valid Taxpayer Identification Number (e.g., Social Security Number or Individual Taxpayer Identification Number) to apply. Also, only those in the U.S. or U.S. territories can apply online. 
  2. Complete IRS Form SS-4: If applying online, you don’t need to submit this form, but having it filled out will guide you through the questions. If mailing or faxing your application, you’ll need to submit Form SS-4. 
  3. Choose an Application Method:
    Online (recommended): The IRS’s online application system is the quickest way to obtain an EIN and provides an EIN immediately upon completion.
    Mail: Send Form SS-4 to the IRS, and you’ll receive your EIN by mail in about 4-6 weeks.
    Fax: Fax Form SS-4 to the IRS, and you should get your EIN within 4 business days via fax. 
  4. Answer IRS Questions: The application will ask about your business structure (e.g., sole proprietor, LLC, corporation), business activities, and reason for requesting an EIN.
  5. Receive Your EIN:
    If applying online, you’ll receive your EIN immediately.
    For mail or fax applications, the IRS will send your EIN by mail or fax in the given timeframe. 
  6. Keep the EIN Confirmation: Once you receive your EIN, save the confirmation letter or document. 

Final Thoughts on Getting EINs for Single-Owner Disregarded LLCs

Obtaining an EIN is a straightforward step that provides added privacy and security for single-member LLCs owned by individuals, especially in light of new BOI reporting requirements. By using an EIN instead of an SSN, business owners can better protect their personal information, reduce risk, and ensure smoother compliance with evolving regulatory requirements. Remember – entities formed in 2024 have 90 days from formation to file their initial BOI Report. New entities in 2025 and on only have 30 days. When applying for an EIN by mail, take note of the prolonged time it takes to receive. It will not change the initial report deadline.  

In an age of growing privacy concerns, having an EIN isn’t just a practical measure; it’s a valuable asset for safeguarding your entities — and your personal privacy.

Do I Include My Spouse as a Beneficial Owner? (LLC as a Husband and Wife in a Community Property State)

When setting up a Limited Liability Company (LLC) or other company in a community property state, it’s important to understand the implications for Beneficial Ownership Information (BOI) reporting. Failing to include your spouse as a beneficial owner may lead to compliance issues. 

Read on to understand the necessary steps and considerations to ensure that your entities comply with BOI reporting requirements.

Which States Are Community Property States?

Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, most property acquired during the marriage is considered jointly owned by both spouses, regardless of who purchased it. This rule includes newly formed LLCs by a married individual.

The Importance of Including Your Spouse as a Beneficial Owner

The Corporate Transparency Act (CTA) requires entities, including LLCs, to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Beneficial owners are individuals who directly or indirectly exercise substantial control over the entity or own at least 25% of the ownership interests.

For entities in community property states, both spouses typically have equal ownership over the property. Therefore, if one individual has 25% ownership interest then they must both be reported as beneficial owners. A newly issued FAQ from FinCEN confirmed that community property considerations should not be ignored. The FAQ reads:

“D. 18. If one spouse has an ownership interest in a reporting company, is the other spouse also considered a beneficial owner if the reporting company is created or registered in a community property state?

Possibly. Whether State community property laws affect a beneficial ownership determination will depend upon the specific consequences of applying applicable State law. If, applying community property State law, both spouses own or control at least 25 percent of the ownership interests of a reporting company, then both spouses should be reported to FinCEN as beneficial owners unless an exception applies.”

Given the above FinCEN guidance, neglecting to include your spouse as a beneficial owner can result in non-compliance with BOI reporting requirements, potentially leading to significant fines and penalties. It is highly recommended to consult with an attorney or CTA compliance expert if you are married and live in a community property state.