CTA for Small Businesses: What is a Beneficial Owner? (Part 2)

Our prior post covered the first way someone might be deemed a “beneficial owner” (BO) under the Corporate Transparency Act (CTA), through direct or indirect ownership of at least 25% of the reporting company.  This post will examine the second way someone can be deemed a BO: through the exercise of “substantial control” over the reporting company. 

Background

As a reminder, the CTA will apply to “reporting companies” starting 1/1/2024 and require them to file a BO report with the US Treasury Department’s financial crimes regulator (FinCEN) identifying their BOs and providing certain information about them. Many thousands of small businesses will be covered by this law and its reporting requirements, violation of which can carry both civil and criminal penalties.

BOs and Substantial Control 

FinCEN has published regulations defining who is a BO. As the name would suggest, owners of a substantial stake in the business are likely to fall under the definition of BO. So are other key persons who may or may not have an ownership stake in the company: those who exercise “substantial control” over the company.  FinCEN has laid out a lengthy definition and several examples of this concept.     

First, FinCEN tells us explicitly that certain individuals are deemed to exercise substantial control.  Senior officers, and persons who hold the power to appoint or remove any senior officer or a majority of the board, fall under the definition and thus qualify as BOs. 

The following individuals also exercise “substantial control” per the regulations:

• Those who “direct, determine, or have substantial influence over important decisions” of the company (see below); and 
• Those who “have any other form of substantial control” over the reporting company. 

The regulations give a list of “important decisions.” These include selling, merging, or reorganizing the business, issuing stock, and taking on significant debt. They also include matters that seem much more mundane, though, such as major expenses or investments, approving the operating budget, expanding or closing lines of business, executive comp, decisions about “significant contracts,” and amending the company’s governing documents or significant policies or procedures. 

Taken at face value, these four categories and the list of “important decisions” might cover board members, senior and mid-tier officers, advisors, investors, and others. To complete its BO report, the company will have to evaluate the role and influence of each eligible person or entity. 

Finally, FinCEN makes clear that substantial control can be exercised indirectly, by individuals who hold board seats, serve as trustees, control a majority of the company’s voting power, enter into certain financing arrangements, control intermediary companies, or are involved in “any other contract, arrangement, understanding, relationship, or otherwise.” 

What to Do Now 

Any company that believes it may be covered by the CTA should begin identifying the people who may qualify as BOs so that counsel can help determine who must be identified in the company’s BO report. As a starting point, this would include owners of at least 25% of the company’s ownership interests (as per the last post). 

In addition, the company will need a list of senior officers, board members, advisors, investors, and others who may “direct, determine, or have substantial influence over” the company’s “important decisions” and other significant matters. Finally, the company will want to examine its financial and other arrangements to see whether there are persons that indirectly exercise substantial control over the company via trust, board, voting or ownership power, or financial or other arrangements. The initial goal should be to produce a list of every potentially qualified individual so that the particulars