Understanding Beneficial Ownership Under the Corporate Transparency Act
Who is a Beneficial Owner Under the Corporate Transparency Act?The Corporate Transparency Act (CTA) requires disclosure of owners and “beneficial owners” of most small business entities to the U.S. Department of Treasury. Once you have determined that your business is subject to CTA reporting requirements, the next question is who is a beneficial owner?
It is important to know that the definition of beneficial owner under the CTA includes more than just people who hold an actual ownership stake in the business. Understanding who has to be disclosed is critical to ensuring compliance with the CTA and avoiding potential penalties. Below, we explore the rules about who is considered a beneficial owner under the CTA. |
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Beneficial Ownership as Defined in the CTA
According to the CTA, a beneficial owner is “an individual who either directly or indirectly: (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of a reporting company’s ownership interests.”
There are some clear guidelines in this definition. If you hold an actual ownership interest of 25% or more, you are a beneficial owner. Similarly, if you directly control the company- for example, you are the Managing Member or Manager of an LLC, or the President or CEO of an incorporation, you would be considered a beneficial owner.
It is important, however, to understand who else the regulations cover, and who will need to be included in your FinCen filing even where ownership interests are not obvious or direct.
There are some clear guidelines in this definition. If you hold an actual ownership interest of 25% or more, you are a beneficial owner. Similarly, if you directly control the company- for example, you are the Managing Member or Manager of an LLC, or the President or CEO of an incorporation, you would be considered a beneficial owner.
It is important, however, to understand who else the regulations cover, and who will need to be included in your FinCen filing even where ownership interests are not obvious or direct.
Ownership Through a Trust
Sometimes the official shareholder or member of a company will not be an individual but a trust. How should this be reported, since the law speaks of “individuals” holding beneficial ownership?
The answer will depend on the trust itself, but generally if the trust holds 25% or more of the ownership, the trustee(s) with control over trust assets should be disclosed. If the trust has only one beneficiary, that beneficiary may need to be disclosed. If any beneficiary has a right under the trust to demand distribution or withdrawal of assets, or if any other party has a right to dispose of trust assets, those individuals may also need to be disclosed. Note that if a beneficiary is a minor child, their information does not need to be disclosed in your report.
The answer will depend on the trust itself, but generally if the trust holds 25% or more of the ownership, the trustee(s) with control over trust assets should be disclosed. If the trust has only one beneficiary, that beneficiary may need to be disclosed. If any beneficiary has a right under the trust to demand distribution or withdrawal of assets, or if any other party has a right to dispose of trust assets, those individuals may also need to be disclosed. Note that if a beneficiary is a minor child, their information does not need to be disclosed in your report.
Non-Voting Interests, Profits Interests and Options
There are many ways in which equity or equity-like interests may be shared in a closely held company. There may be non-voting shares, or interests that are defined as rights to share in profits without holding actual equity in the company. The profits interests are known by many names, including profits interest, phantom equity, or profit sharing. There are also often options to buy into equity that re used as part of incentive programs for key employees.
The CTA attempts to reach all of these kinds of interests, by specifically including in the regulations “any capital or profit interest” and “any option or privilege of buying or selling” any of the listed types of ownership.
Remember that the 25% threshold still applies. If you have profits interests or options for key employees and they don’t exceed 25% for any one employee, that person need not be disclosed as a beneficial owner.
The CTA attempts to reach all of these kinds of interests, by specifically including in the regulations “any capital or profit interest” and “any option or privilege of buying or selling” any of the listed types of ownership.
Remember that the 25% threshold still applies. If you have profits interests or options for key employees and they don’t exceed 25% for any one employee, that person need not be disclosed as a beneficial owner.
What is Substantial Control?
As with the definition of ownership, there are some categories that clearly do fall within the definition of substantial control. For example, FinCen guidance lists the following as positions that are considered to have substantial control: President, CFO, CEO, COO, or General Counsel of a company. The guidance further states that anyone with the power to appoint or remove any of those individuals is considered someone with substantial control.
Where it gets less clear is that FinCen also considers an individual with “important decision-making authority” or anyone with “any other form of substantial control over the reporting company” to be beneficial owners.
It is likely that these broader, catch-all categories exist to ensure that reporting companies do not seek to exclude people from the definition by simply retitling them something other than CEO, CFO, etc., and that anyone who truly exercises control over a company is subject to the reporting requirement.
This can make it tricky for a reporting company, however, to know exactly who to disclose in its reporting. If you have anyone who does make major decisions in your company and who is not also a named officer or direct owner, it is a good idea to consult with an attorney before making your FinCen filing to be sure that your business is in compliance.
Where it gets less clear is that FinCen also considers an individual with “important decision-making authority” or anyone with “any other form of substantial control over the reporting company” to be beneficial owners.
It is likely that these broader, catch-all categories exist to ensure that reporting companies do not seek to exclude people from the definition by simply retitling them something other than CEO, CFO, etc., and that anyone who truly exercises control over a company is subject to the reporting requirement.
This can make it tricky for a reporting company, however, to know exactly who to disclose in its reporting. If you have anyone who does make major decisions in your company and who is not also a named officer or direct owner, it is a good idea to consult with an attorney before making your FinCen filing to be sure that your business is in compliance.
Updating Your BOI Reporting
Generally, the FinCen filing is a one time thing that does not have to be repeated annually. However, you are required to make a new filing whenever there is a change in beneficial ownership. Actual ownership may not change that often, but given the broad definition of “substantial control” you may find yourself needing to make an updated filing whenever there is a change in your executive or C-Suite personnel.
How We Can Help
Navigating the complexities of the Corporate Transparency Act can be challenging. Our expert team is here to assist you in identifying all beneficial owners, ensuring accurate and compliant FinCen filings, and providing ongoing support for any changes in ownership or control. Let us help you stay compliant and avoid potential penalties. You can use the button below to schedule a free information call, or give us a call at (781) 784-2322.
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