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: 

• BOI Filing Deadline 

• Corporate Transparency Act Reporting 

• BOI Reporting Exemptions 

• FinCEN BOI Penalties 

• A Guide to BOI Reporting 

• Common Challenges in FinCEN Reporting