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What Business Owners Should Know

Part 2 of Series

This post is the second in our series regarding the Corporate Transparency Act (the “Act”), which was adopted by Congress in December of 2020, with Final Regulations issued by the Financial Crimes Enforcement Network (FinCEN) in September 2022, and which is set to take effect on January 1, 2024. In the first post, we discussed the types of organizations that will be required to file beneficial ownership reports under the Act.

In this post, we will discuss the questions, “who is a ‘beneficial owner’ under the Act,” and “what information must be disclosed to FinCEN?”

Who is a Beneficial Owner?

A beneficial owner under the Act is someone who: (1) exercises substantial control over a reporting company; or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The definition of beneficial owner does not include minor children, individuals acting as an agent, intermediary, custodian, or nominee on behalf of another individual, individuals acting solely as employees, individuals whose only interest in a reporting company is through a right of inheritance, or creditors of a reporting company (subject to certain exceptions).

Whether a person owns 25 percent of a reporting company is an easy determination. But what does “substantial control” mean for purposes of the Act? The Act provides that an individual exercises substantial control if that person:

  • Serves as a senior officer of the reporting company;
  • Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
  • Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:
    • The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
    • The reorganization, dissolution, or merger of the reporting company;
    • Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
    • The selection or termination of business lines or ventures, or geographic focus, of the reporting company;
    • Compensation schemes and incentive programs for senior officers;
    • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
    • Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or
  • Has any other form of substantial control over the reporting company.

Readers should note that the above definition of “substantial control” is merely a list of examples, and is not comprehensive. As such, the determination of whether an individual has “substantial control” is a “facts and circumstances” analysis. Most reporting companies will include (a) all directors; (b) senior executive officers; and (c) any person with a “veto right” or “consent right” over key decisions.

What information must be disclosed?

Reporting companies under the Act must disclose the (a) full legal name; (b) date of birth; (c) current residential street address; (d) unique identifying number (such as a passport or drivers license number); and (e) an image of the document from which the unique identifying number was obtained, for each beneficial owner.

While much of the information that must be disclosed about a beneficial owner is unlikely to change, reporting companies must report changes in information to FinCEN. This amounts to substantial administrative work for reporting companies to keep information regarding beneficial owners up-to-date. Companies should appoint a Compliance Officer or other trusted individual to keep accurate records and provide timely updates to FinCEN. Compliance procedures should be adopted such that this Compliance Officer is notified of, for example, a change in a beneficial owner’s residence address.

Stay Tuned

Now that we have established who must make disclosures and what information must be disclosed under the Act, we will discuss the penalties for non-compliance with the Act, and the “safe harbor” for those who unintentionally violate the Act, in our next post of this series. Stay tuned!