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Deep Dive into the Corporate Transparency Act:  Who is a “Beneficial Owner?”

There’s been a lot of buzz lately about the Corporate Transparency Act (“CTA”), and that’s for good reason.  On a recent webinar sponsored by the American Bar Association, one of the panelists dubbed it the “most significant change to corporate law since the invention of the LLC.”  For general information on the CTA and its purpose, read our blog on Navigating the Corporate Transparency Act, here.

This blog post will expand on the CTA’s broad definition of “beneficial owner.”  I suspect that many small business owners will be quite surprised to realize how many beneficial owners they must name in their company’s “Beneficial Owner Information” report (“BOI report”).  When I pause to consider the reason for the CTA, I understand why Congress defined the term broadly.  However, I expect a lot of confusion and consternation as companies struggle to decide who makes the cut for this rather dubious distinction.  If you want advice on this legal issue, please get in touch.

The Beneficial Owner of a Reporting Company (that’s your LLC or corporation) is an individual who holds a position of significant influence or ownership in the entity. This means either:

  1. Through the exercise of “substantial control” over the Reporting Company; or
  2. By having an “ownership interest” through owning or controlling twenty-five percent (25%) or more equity in the Reporting Company.

The term “Substantial Control” is expansively defined and included direct and indirect control.  Examples of direct control include senior officers (including the President, CEO, CFO, COO, and General Counsel), individuals with the power to appoint or remove senior officers or the majority of the board of directors, those capable of directing or influencing vital matters of the Reporting Company.  Individuals can wield indirect substantial control “through contracts, arrangements, understandings, relationships, or otherwise.” (FinCEN’s Small Entity Compliance Guide, December 2023, p. 19 available here).  Indirect substantial control is a catchall for anyone exerting any other form of substantial control. 

 

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Chart courtesy of FinCEN’s Small Entity Compliance Guide, December 2023

The concept of “Ownership Interest” is similarly comprehensive, including not only straightforward equity ownership but also incorporating profits interest, convertible instruments (whether categorized as equity or debt), warrants, and puts, calls, and options. It is noteworthy that FinCEN examines ownership both directly and indirectly, meaning they scrutinize intermediary holding companies to unveil the ultimate individual owners. By giving FinCEN this authority, Congress intends for it to gain a thorough understanding of the ownership landscape within Reporting Companies. 

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Chart courtesy of FinCEN’s Small Entity Compliance Guide, December 2023

We recommend that you conduct a thorough, written analysis of your company’s ownership and leadership structure and if you have any doubts, seek our legal advice.  If FinCEN inquires why you did not name a particular person as a beneficial owner, then you will want a written record of the analysis you conducted and the legal advice you sought.

Note that some people are exempt from the Beneficial Owner definition:

1. Minor children: Individuals below the age of majority are exempt. BUT the Reporting Company must instead provide the required information for the minor child’s parent or legal guardian.

2. Mere Intermediaries or Agents: Individuals serving solely as intermediaries or agents fall within the exemption.

3. Control through Employment: Individuals whose control over a Reporting Company arises exclusively from their employment are exempt, with the caveat that this exclusion does not extend to senior officers.

4. Interest through Inheritance Only: Individuals with a stake in a Reporting Company solely through a right of inheritance are exempt. However, you should recognize that the death of a shareholder and the transfer of that shareholder’s stock to an heir are changes that your reporting company must report to FinCEN on an updated BOI report.

5. Creditors of Reporting Companies: Individuals holding creditor status with Reporting Companies are also exempt from the Beneficial Owner definition.

Information Required for BOI Reporting:

A Reporting Company must furnish the following details for each Beneficial Owner:

A. Full Legal Name: The complete legal name of the individual.

B. Date of Birth: The birth date of the Beneficial Owner.

C. Current Address: The present residential or business address of the Beneficial Owner.

D. Unique Identifying Number: A distinct identifying number from an unexpired passport, state driver’s license, or state/ local identification document issued for purposes of identifying an individual. Additionally, an image of the document is required for verification purposes.

We can help you work through the required analysis and reach clarity on who your company’s beneficial owners are.  Then you can complete the required filing and go back to growing your business (until changes must be reported, that is).  Please reach out if you want help.

 

Image by Gerd Altmann from Pixabay