CORPORATE TRANSPARENCY ACT – WHO IS A BENEFICIAL OWNER?

If you are a business, you should already be aware (from numerous news articles and law firm news blasts) of the new reporting requirements that are mandated by the Corporate Transparency Act (CTA). The CTA requires new entities formed 1/1/24 or later that are not exempt from the reporting requirements to file a beneficial ownership information (BOI) report within 90 days. It also requires non-exempt entities formed prior to 1/1/24 to file BOI reports by 1/1/25. The reports must be filed electronically with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FINCEN) at fincen.gov/boi. There are potential civil and/or criminal penalties for failure to file BOI reports.

If you would like assistance from our office in determining whether you need to file and with the filing itself, we can help if we are specifically engaged by you. We can either assist you with the filing directly or provide referrals to third party services that specialize in filing BOI reports. Due to the large number of filings expected before the end of the year, we encourage you to reach out to us before October 2024 if you would like our assistance.

This Q&A (which is qualified by the full text of the CTA and regulations provided thereunder) focuses on who is a beneficial owner for purposes of filing BOI reports. This supplements our last Q&A in which we focused on some of the common exemptions from the BOI reporting requirements.

Question: If my company is a reporting company and does not qualify for an exemption from the BOI reporting requirements, then who must be included in the BOI reports?

The BOI report for your company must include its beneficial owners. A beneficial owner means any person who exerts substantial control and any person who owns or controls at least 25% of the company’s ownership interests.

Question: What constitutes exerting substantial control?

An individual can exert substantial control if the person:

• is a senior officer; or
• has authority to appoint or remove certain officers or a majority of the board of directors or similar governing body; or
• is an important decision maker; or
• has any other form of substantial control.

The individual only needs to meet one of the above criteria to be considered a beneficial owner. There is no maximum number of beneficial owners that can be identified.

Who is included as a senior officer?

A senior officer includes individuals holding the position or exercising the authority of:

• president
• chief financial officer
• general counsel
• chief executive officer
• chief operating officer
• any other officer, regardless of official title, who performs similar functions to the above listed officers

What is meant by an important decision maker?

An important decision maker is any individual who directs, determines or has substantial influence over important decisions made by the company, including decisions relating to:

• business, such as
  • nature, scope and attributes
  • selection or termination of business lines or ventures, or geographic focus
  • entry into or termination, or the fulfillment or non-fulfillment, of significant contracts
• finances, such as
  • sale, lease, mortgage or other transfer of any principal assets
  • major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget
  • compensation schemes and incentive programs for senior officers
• structure, such as:
  • reorganization, dissolution or merger
  • amendments of any substantial governance documents

What must the company consider for purposes of determining control of 25% or greater ownership interest?

The BOI reports must include information on all individuals who own or control a 25% or greater ownership interest. Ownership interest can include equity, stock or voting rights, other instruments regardless of voting rights, capital or profits interests, convertible instruments or derivatives such as warrants, puts, calls or similar instruments (even if issued as a debt), and any other instrument, contract or arrangement to establish ownership.

These Q&As cover the most common questions for companies to determine who is a beneficial owner. This is a summary based on many detailed definitions included in the CTA and regulations. You should work with an advisor to identify your beneficial owners and then file your BOI reports well in advance of the deadline.