CTA for Small Businesses: What is a Beneficial Owner? (Part 1)

Starting in 2024, millions of small companies will have to disclose to the feds who their “beneficial owners” (BOs) are (and provide identifying information about their BOs).  What, then, is a BO?  As you might expect, it includes certain owners of the business.  But it also has a potentially broader sweep:

[T]he term “beneficial owner” … means any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.  (Emphases added.)

In terms of this definition, there is one relatively straightforward test and one that is more difficult.  

Owns or Controls

The "owns or controls" test is, largely, a math problem that requires a reporting company to identify its large owners or the people that control at least 25% of its stock or other ownership interest (such as an interest in an LLC).  There are nuances, however.

For one thing, only individuals count as BOs.  If a reporting company is owned at least 25% by another company, then the beneficial ownership of that other, intermediary company must ultimately be disclosed.  The goal is to get to the humans who ultimately own or control substantial portions of a reporting company, even if that means analyzing the ownership and control of intermediary companies.  

The regulations also define what might constitute “direct or indirect” ownership or control.  These definitions capture arrangements such as ownership through a trust or custodianship, for example.  Finally, the regulations also define what constitute ownership interests that must be accounted for when doing the math to figure out who owns 25%-plus.  Thus, although this part of the test for a BO is the simpler of the two, it is not quite as simple or straightforward as it may seem on paper.  

Substantial Control

The second standard is harder to define and potentially very broad. In the regulations, the drafters have identified a number of roles or activities that could constitute “substantial control” over the reporting company. We will cover these in more detail in a separate post, but be aware that board members, officers, anyone with the power to appoint or remove senior officers, anyone who “directs, determines, or has substantial influence over” certain financial and other transactions, and others with “any other form of substantial control” may all count as BOs.  

Why It Matters

All companies that are covered by the CTA and do not qualify for an exemption will have to go carefully through the regulations to determine who their BOs are within the meaning of the law. Even the simple form of determining who is a BO – by “owned or controlled ownership interests” – has many levels and tests to determine the identity of the individuals behind the company. As we will see in a separate post, the fact that people with significant authority might also qualify as BOs makes the inquiry much more complicated.  

What to Do Now

Companies that believe they may be covered by the CTA should seek advice now on whether they are a “reporting company” and whether they must file a BO report. If the answer is yes, the company can start working out who its BOs are and collecting from them the identifying information that must be filed with the feds.