Who Is A Beneficial Owner Under The Corporate Transparency Act?

Understanding Beneficial Ownership Information Reports

1. Overview of the Corporate Transparency Act
2. The Importance of Beneficial Ownership Information Reporting for Businesses
3. What Entities Must File Beneficial Ownership Information Reports?
4. Exemptions to the Beneficial Ownership Information Reporting Requirements
5. What to Do If You Have to File a Beneficial Ownership Information Report
6. Who is a Beneficial Owner Under the Corporate Transparency Act?
7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
8. Who is a Company Applicant Under the Corporate Transparency Act?
9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
10. FinCEN Identifier: A Simplified Compliance Tool
11. Beneficial Ownership Information Reporting: Updates and Corrections

Who Is A Beneficial Owner Under The Corporate Transparency Act?

Under the Corporate Transparency Act, a “beneficial owner” is defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25 percent of the ownership interests of a reporting company. An individual can be a beneficial owner through substantial control, ownership interests, or both. A reporting company is required to (1) identify all of its beneficial owners and (2) report information related to each beneficial owner on a beneficial ownership information report, unless the individual is subject to an exclusion from the definition of beneficial owner. In this article, we will describe how a reporting company can identify its beneficial owners.

To determine who the beneficial owners of a reporting company are, you should follow these steps:

Identify Individuals Exercising Substantial Control: Determine if any individuals exercise substantial control over the reporting company. This could include senior officers or others who have significant influence over important decisions within the company.

To identify if an individual exercises substantial control over a reporting company, consider the following criteria:

1. Senior Officer: Determine if the individual holds a position or exercises the authority of a senior officer within the reporting company. Examples of senior officers include a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function. An individual’s title does not determine if he or she is a senior officer. Instead, the individual’s role within the reporting company must be analyzed to determine if he or she exercises the authority of a senior officer. Senior officers exercise substantial control. Such individuals are therefore beneficial owners.
2. Authority to Appoint or Remove: Check if the individual has the authority to appoint or remove senior officers or a majority of the board of directors (or similar governing body) of the reporting company. Such powers are exercised by individuals with substantial control of a reporting company. Accordingly, anyone with such appointment or removal powers will be a beneficial owner of the reporting company.
3. Important Decision-Maker: Assess whether the individual directs, determines, or has substantial influence over important decisions made by the reporting company. The first consideration is whether someone exercises sufficient control over important internal reporting company decisions. Merely having substantial influence over such decisions is sufficient. The second consideration is identifying important decisions. The Financial Crimes Enforcement Network (FinCEN) has provided some examples of important decisions, which can help to narrow the scope of this otherwise broad definition:
   1. The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company,
   2. The reorganization, dissolution, or merger of the reporting company,
   3. Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company,
   4. The selection or termination of business lines or ventures, or geographic focus, of the reporting company,
   5. Compensation schemes and incentive programs for senior officers,
   6. The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts, and
   7. Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.
   8. This list includes examples of what FinCEN has determined to be important decisions. But the list is not exhaustive. Anyone with the ability to direct, determine, or even with substantial influence over these or any similar reporting company decisions will be deemed to exercise substantial control. All such individuals will be beneficial owners.

4. Other Forms of Control: This is a catch-all provision, and is drafted broadly. Consider if the individual has any other form of substantial control over the reporting company. This rule is meant to prevent evasion of beneficial ownership information reporting through structuring. If your reporting company has a novel or flexible corporate structure, or if there are multiple levels of control, pay close attention to this rule.
5. Indirect Control: Evaluate if the individual exercises control through intermediary entities or through arrangements, relationships, or other means that allow them to exercise substantial control over the reporting company. Again, this provision is drafted broadly. Indirect control can include control of a reporting company exercised by trustees of a trust, other entities, or any other arrangement. Indirect control can be exercised through:
   1. Board representation,
   2. Ownership or control of a majority of voting power or voting rights,
   3. Rights associated with financing arrangements or interests in the company,
   4. Control over one or more other entities that separately or collectively exercise substantial control over a reporting company,
   5. Any arrangements or relationships with the reporting company through nominees,
   6. Any other contracts, arrangements, or even an understanding or relationship.

These criteria can help you determine who exercises substantial control over the reporting company. All such individuals should be reported as beneficial owners on the company’s beneficial ownership information report, unless they qualify for an exception

Assess Ownership Interests: Identify any individuals who directly or indirectly own or control at least 25 percent of the ownership interests of the reporting company. Commonly, ownership interests can be through shares of stock or membership interests in an LLC. But the Corporate Transparency Act includes many other incidences of ownership in its definition of “ownership interests.” Again, this is meant to prevent avoidance of beneficial ownership information reporting through structuring.

To determine if an individual has an ownership interest in a reporting company, you can follow these steps:

1. Identify Types of Ownership Interests: Review the types of ownership interests that may exist within the reporting company, such as equity, stock, voting power or rights, capital or profit interests, convertible instruments, options, or other privileges to buy or sell any of these interests. Also look to any other instruments, contracts, arrangements, understandings, relationships, or mechanisms that the reporting company uses, which may establish ownership.
2. Consider Direct and Indirect Ownership: Determine if the individual directly or indirectly owns or controls types of ownership interests. Direct ownership could be through joint ownership with others, while indirect ownership might involve intermediary entities or through another individual acting as a nominee, intermediary, custodian, or agent. If a trust holds any ownership interests, indirect ownership may be imputed to trustees, beneficiaries, and the grantor or settlor.
3. Calculate Ownership Percentage: Calculate the percentage of ownership interests held directly or indirectly by each individual.
   1. For corporations, this could involve calculating the greater of (1) the total combined voting power of all of an individual’s ownership interests as a percentage of the total outstanding voting power of all classes of ownership interests entitled to vote or (2) the individual’s total value of the ownership interests as a percentage of the total outstanding shares.
   2. For entities treated as partnerships for federal income tax purposes, this could involve calculating the individual’s capital and profit interests as a percentage of the total outstanding capital and profit interests.
   3. Otherwise, calculate the percentages that all individuals own of all types of ownership interests of the reporting company.
   4. Keep in mind that ownership interests are calculated at the present time: any options or similar interests are to be treated as if they were exercised.
4. Apply the 25 Percent Threshold: After identifying the types of ownership interests and who owns or controls them, determine who owns or controls 25 percent or more of those ownership interests. Individuals who own or control 25 percent or more of the ownership interests in the company will be reported as beneficial owners on the reporting company’s beneficial ownership information report unless they qualify for an exception.

By following these steps, you can identify individuals who have an ownership interest in the reporting company and determine if they meet the threshold to be reported as beneficial owners. There are legal or factual issues that may complicate the beneficial ownership analysis. Hiring experienced counsel to help you navigate your beneficial ownership information reporting requirements can help you avoid costly mistakes.

Conclusion

Determining beneficial ownership can be complex, especially when ownership structures involve multiple layers or when control is not straightforward. We invite you to leverage our knowledge and experience to navigate the intricacies of beneficial ownership. Contact us to ensure your entity meets its obligations and to gain peace of mind in your compliance efforts.