Part III: Who is Considered a Beneficial Owner?

Last week, we reviewed the types of entities required to report their Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN) in Part II of this BOI series. Now that we've discussed which entities are considered reporting companies, in today's post, we are going to examine who is considered a Beneficial Owner for FinCEN reporting.

Once you have established that your company is considered a reporting company, the next step is to determine who the beneficial owners that must be reported are. In many cases, the beneficial owners will not be limited to the individuals you think of as the "owners" of the company. There may be other individuals who must be reported. A beneficial owner is defined as any individual who, directly or indirectly:

• Exercises substantial control over a reporting company; OR

• Owns or controls at least 25 percent of the ownership interests of a reporting company.
  

So, individuals with 25% or more of the ownership are considered beneficial owners. However, it is noteworthy that you can also be considered a beneficial owner if you do not have any ownership interest but do exercise substantial control.

A CEO of a corporation is a clear example of an individual considered to be a beneficial owner for purposes of BOI reporting.

Exercising Substantial Control

Some questions to ask that that will help you identify examples of individuals considered beneficial owners as a result of exercising substantial control over your company are:

• Does your company have a Board of Directors or similar body with an individual who has the ability to appoint or remove a majority of the board members?

• Are there senior executive positions at the company like President, Chief Financial Officer, Chief Executive Officer, Chief Operating Officer, General Counsel, etc.?

  • Or are there positions that function similarly?

Ownership or Control of Ownership Interests

When determining whether or not an individual owns or controls 25% or more of a company, the best place to start is with the entity's structure. Is the entity an LLC or a corporation?

If an LLC, you must determine who the members are and what percentage of the membership units each member possesses. If the entity is a corporation, then look to who owns stock interests and determine which individuals own 25% or more. Additionally, you should take a look at who controls the voting rights. If anyone controls 25% or more then they are likely also a beneficial owner who must be reported.

Now, let's wrap this up with a quick example to tie it together. Today, we are going to examine ABC Corp. which has been determined to be a reporting company. ABC is a corporation with stocks as the ownership interest.

Individual	Stock Interest	Position at ABC
Alicia	50%	None
Bobby	25%	CEO
Christopher	10%	Admin. Assistant
Darlene	10%	None
Elizabeth	5%	CFO

Assuming that there are no other relevant facts: who do you think the beneficial owners that must be reported are?

The answer is Alicia, Bobby and Elizabeth. Alicia holds 50% of the stock interest, which is clearly greater than 25% so she qualifies based on ownership. Bobby is a beneficial owner under both prongs. He holds 25% of the stock interest, so he checks the box for ownership. Additionally, in his role as Chief Executive Officer of ABC Corp., he exercises substantial control over the entity. Lastly, Elizabeth holds 5% stock ownership. This is clearly less than 25%, so she is not a beneficial owner under this prong. However, she is the Chief Financial Officer at ABC and likely controls, directs or has substantial influence over ABC's finances in that role. As a result, she is a beneficial owner under the substantial control prong.

Christopher and Darlene would not be considered beneficial owners without any other relevant facts. While both hold 10% stock interests, which is double the amount Elizabeth holds, neither one holds 25% nor do they exercise substantial control. Darlene does not hold a position at ABC and Christopher, while likely important to the operation of ABC, probably does not meet the criteria of exercising substantial control for BOI purposes in his role as an Administrative Assistant.

Next week, in Part IV, we will discuss the type of information you need to collect and report to FinCEN.

Please note that this blog post is not an exhaustive examination of every type of individual who is considered a beneficial owner. Rather, this is a cursory overview of some examples. If you would like us to review and discuss your entity, please contact our office.

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The information in this blog is provided solely for informational purposes. The information provided is not intended to create an attorney-client relationship and shall not be construed as legal advice on any specific matter. Each legal matter is unique and requires an analysis based on the particular circumstances. As a result, the information provided here may not be applicable in every situation, including your situation, and action should not be taken based on this information without seeking specific legal advice based on particular circumstances. Results may vary depending on your particular facts and legal circumstance.