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Editorial 10 MIN READ

Dissolving cleanly at the end of 2021: the FinCEN overlay

The old checklist still works, the Wayfair tail still bites, and now a federal beneficial-ownership report is on the far side of cancellation

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 7 sections
  1. What the home-state mechanics still look like
  2. The Wayfair tail in its fourth calendar year
  3. The federal side and Form 966
  4. The CTA overlay: present posture, future filing
  5. The mistakes that keep costing people money
  6. Rule of thumb
  7. Sources

losing an entity in December 2021 is still four filings and a return, the same architecture we walked through in January 2017 and rewrote for the Wayfair era in June 2019. The federal beneficial-ownership regime at § 6403 of the Corporate Transparency Act adds a fifth obligation on the back end for reporting companies, but the rule is not yet in force and the practical answer for anyone dissolving this quarter is to finish the old list first and queue the CTA follow-up for when FinCEN finalizes.

The tax geography has not improved. It has hardened.

What the home-state mechanics still look like

The statutes have not moved since we last walked through them. A Delaware LLC files a Certificate of Cancellation under 6 Del. C. § 18-203, which directs cancellation "upon the dissolution and the completion of winding up." The filing fee under 6 Del. C. § 18-1105(a)(3) is $200. The Division of Corporations will not issue a certificate of good standing after cancellation, which remains the detail buyers and lenders ask about first. A Delaware corporation dissolves under 8 Del. C. § 275, and the corporation must be current on franchise tax before the Division will accept the Certificate of Dissolution. Franchise tax accrues until the dissolution is on the rolls; a resolution adopted in August 2021 and left in a drawer through March 2022 means 2022 franchise tax is due.

For a California LLC, the short-form path under Form LLC-4/8 still works if the twelve-month window is open, no business has been done, there are no debts other than LLC tax liabilities, assets have been distributed to those entitled, and the members consent unanimously. The payoff is the $800 minimum tax under Cal. R&TC § 17941 never attaches for the first tax year. Miss any box and it is the full path: Form LLC-4/7, a final Form 568, and the $800 minimum for the tax year of the final return. LLC-4/7 must be filed within twelve months of the final-return date, or the FTB will keep assessing $800 a year.

For a New York LLC, NY LLC Law § 705 still requires Articles of Dissolution filed with the Department of State, and § 703 still assigns authority to wind up to the members unless the operating agreement says otherwise. Distribution order under § 704 is creditors first, then members. Texas, Florida, and the other anchor states follow the same rhythm: a certificate filed with the secretary of state, a final franchise or annual report, a clean break.

None of this is the 2021 story. The 2021 story is what sits around the state filings.

The Wayfair tail in its fourth calendar year

South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) is now three and a half years old, long enough that almost every state with a sales tax has an economic-nexus statute on the books and at least one amended version of it. Florida joined in July 2021 under Ch. 2021-2, Laws of Fla., with a $100,000 threshold effective July 1, 2021. Missouri's enactment under SB 153 takes effect January 1, 2023, which means Missouri is the last holdout through the 2021 dissolution window. Everywhere else, a seller with non-trivial remote revenue between mid-2018 and the dissolution date should assume it crossed a threshold somewhere it was never registered.

The mechanics on the way out are the ones we mapped in 2019 and they have only gotten more expensive to skip. Reconstruct the sales history state by state, identify every threshold crossing, register (if only to deregister), file the back returns, remit the tax, and close the account. Voluntary-disclosure agreements remain the cheapest path: most states cap the lookback period and waive penalties in exchange for prospective compliance, and "prospective" in a dissolution context means "none," which is the point.

The persistence problem is worse than it looks. A sales-tax registration does not evaporate when the entity is canceled with the secretary of state. The two systems do not share data. An administratively dissolved LLC can keep accruing minimum-return filings and late-filing penalties in a state's revenue database for years after the entity has no legal existence, and several states pursue successor liability against the members for tax assessed during that stretch. The 2021 answer is the same as the 2019 answer and more so: close every sales-tax account in writing and keep the confirmation. Treat the department of revenue as a separate counterparty from the secretary of state, because it is.

Income-tax nexus runs on a parallel track. Public Law 86-272 still shields solicitation of orders for tangible personal property, but the Multistate Tax Commission's revised statement on § 86-272, adopted August 2021, takes the position that routine website interactions with in-state customers (cookies, chat, app functions) strip the protection. Several states have begun aligning with that reading. A dissolving business with digital-services or SaaS revenue into multiple states should audit state income-tax filings for the same look-back window as the sales-tax review and file any missing final returns before cancellation. A closed registration is a much harder audit target than an open one.

The federal side and Form 966

Form 966 remains mandatory for corporations under IRC § 6043(a) and 26 CFR § 1.6043-1. The form is filed within thirty days after the adoption of a resolution or plan to dissolve, with a certified copy of the resolution attached. The final Form 1120 or 1120-S has the "final return" box checked, final K-1s go to shareholders, and liquidating distributions are reported on Forms 1099-DIV when treated as ordinary dividends or on the shareholder's Schedule D when treated as exchange under IRC § 331. Corporate-level gain or loss on distributed property is recognized under IRC § 336. A partnership files a final Form 1065 with the "final return" box checked; a disregarded single-member LLC simply stops appearing on the owner's Schedule C or 1120.

The § 199A deduction still applies in the final year under Treas. Reg. § 1.199A-1. Short-period W-2 wages and UBIA can be mis-annualized; negative final-year QBI carries over to the owner's next year. The TCJA sunset under § 199A(i) is still scheduled for tax years beginning after December 31, 2025, so a 2021 final year is well inside the window and worth computing carefully.

Payroll is procedural but unforgiving. File the final Form 941 with the "final return" box checked, file Form 940 for the year, issue W-2s and W-3, and, for 2021, separate the 1099-NECs (which became their own form again in 2020) from the 1099-MISC. Close the state unemployment and withholding accounts in writing. An open state UI account generates quarterly zero-return obligations and eventually an estimated-assessment notice that compounds.

The CTA overlay: present posture, future filing

The Corporate Transparency Act was signed into law over presidential veto on January 1, 2021 as part of Pub. L. 116-283. Section 6403 of that act drops a new § 5336 into Title 31 of the U.S. Code, and it is the provision dissolving owners should keep an eye on. FinCEN issued an Advance Notice of Proposed Rulemaking on April 5, 2021 (86 Fed. Reg. 17557) and followed with a Notice of Proposed Rulemaking on December 8, 2021 (86 Fed. Reg. 69920), which is out for comment as this is written. A final rule is expected in 2022.

The practical question for a December 2021 dissolution is whether anything is owed to FinCEN on the way out. The statutory answer is nuanced. The reporting obligation attaches on the effective date of the final rule, not before. An entity that is canceled with its secretary of state before the final rule takes effect never becomes a reporting company in the first place, because the reporting obligation is on entities "created" or "registered" and still in existence at the time the rule bites. An entity that is canceled after the final rule's effective date will likely owe an initial report (if formed post-effective-date) or fall inside the backfill window (if it existed before), and, if applicable, will owe an updated or final report documenting the dissolution itself. The proposed rule contemplates an ongoing duty to file updated reports within thirty days of a change; whether a final report on cancellation becomes its own instrument is one of the operational questions the comment cycle will resolve.

For anyone dissolving this month, the cautious posture is three moves. First, assume that if the final rule lands in 2022 and your entity still exists when it does, you will need to file a beneficial- ownership report and then a closeout once the entity is canceled; document the beneficial-owner universe now, while the people are still reachable, and keep the file. Second, if the dissolution can be completed in December 2021, complete it, because an entity that no longer exists when the rule takes effect is outside the reporting population on the face of the statute. Third, if the entity is inside one of the 23 exemptions in 31 U.S.C. § 5336(a)(11)(B) (the large-operating-company carveout at (xxi) and the inactive-entity carveout at (xxiii) are the two most often misread), document the exemption now with a contemporaneous memo. A later FinCEN inquiry into a dead entity's status goes much better with a dated file than with reconstruction.

The CTA does not change the Delaware filing, the California filing, the final 1120, or the Wayfair reconstruction. It adds a separate federal obligation that a dissolving owner either outraces (by finishing before the rule's effective date) or documents for the filing that will follow.

The mistakes that keep costing people money

The 2017 list (not foreign-withdrawing, missing the California short-form window, skipping Form 966, distributing before creditors are paid) and the 2019 additions (treating cancellation as the end of sales-tax obligations, ignoring post-Wayfair states, forgetting § 199A) are all still on the scoreboard. 2021 adds two.

First, closing the entity but leaving the people unreachable. When the CTA final rule lands, any outstanding reporting obligation will attach to identifying information about individuals who owned or controlled the entity. If the LLC dissolves in December 2021 and the two members lose touch in 2022 before the rule takes effect, the member who ends up holding the compliance bag will not have the other member's current address, ID-image, or consent to file. Build the file now.

Second, assuming the CTA falls on the entity's lawyer or formation service. The statute's civil penalty at 31 U.S.C. § 5336(h)(1) of up to $500 a day for willful failures, and criminal penalty at (h)(3) of up to $10,000 and two years' imprisonment, attaches to the person whose information was supposed to be reported. A formation service can file on an entity's behalf; it cannot cure a failure after the entity is dissolved and the client has moved. Operating agreements executed in 2021 should already be putting the reporting obligation and the indemnity on the members in writing. Operating agreements being wound up this month can document the same allocation on the way out.

Rule of thumb

In December 2021, a clean dissolution is four state filings plus Form 966 plus final sales-tax and payroll returns, run in the order we mapped in 2017 and rewrote in 2019, with one new file kept on the side: a contemporaneous record of the beneficial-ownership universe the entity would have had to report under 31 U.S.C. § 5336 if the final FinCEN rule had already taken effect. Finish the state work, close the sales-tax accounts in writing, file Form 966 within thirty days of the wind-up resolution, and keep the CTA file. The franchise-tax meter stops running in the states you remembered, the sales-tax meter stops running in the states you did not, and the FinCEN obligation either never attaches or attaches to a file you already built.

Sources

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