As part of the Corporate Transparency Act, Reporting Companies must report on Beneficial Owners (FinCEN has a detailed FAQ on the subject). “Beneficial Owners” is a fairly broad definition, and may include people who don’t have much ownership interest in a company.

A Beneficial Owner is an individual who either directly or indirectly: 

1. Exercises substantial control over a reporting company 
2. Owns OR controls at least 25 percent of a reporting company’s ownership interests

Beneficial owners must be individuals. 

Trusts, corporations, or other legal entities are not considered to be beneficial owners. However, in specific circumstances, information about an entity may be reported in lieu of information about a beneficial owner.

What is Substantial Control?

An individual can exercise Substantial Control over a reporting company in four different ways. If any of these apply, they have Substantial Control:

1. The individual is a senior officer (the company’s president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function).
2. The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company.
3. The individual is an important decision-maker for the reporting company. Important decisions include decisions about a reporting company’s business, finances, and structure. An individual that directs, determines, or has substantial influence over these important decisions exercises substantial control over a reporting company.
4. The individual has any other form of substantial control over the reporting company as explained further in FinCEN’s Small Entity Compliance Guide (see Chapter 2.1, “What is substantial control?”).

What is “Owns or controls at least 25 percent of a reporting company’s ownership interests”?

This can be a complicated question to answer for some companies, and FinCEN has a detailed guide on the subject as part of its BOI compliance guide. When in doubt, refer to your legal counsel for help determining who your Beneficial Owners are.

Who qualifies for an exception from the beneficial owner definition?

There are 5 exceptions to the Beneficial Owner definition:

1. Minor Child - the individual is a minor child, as defined under the law of the State or Indian tribe in which the domestic reporting company is created or the foreign reporting company is first registered.
2. Nominee, intermediary, custodian, or agent - the individual merely acts on behalf of an actual beneficial owner as the beneficial owner’s nominee, intermediary, custodian, OR agent. 
3. Employee - an individual qualifies for this exception if all three of the following criteria apply:some text
   1. The individual is an employee of the reporting company, when applying the meaning of “employee” provided in 26 CFR 54.4980H-1(a)(15). In general, the term employee means that an individual is subject to the will and control of the employer in what and how to do work, and that the employer may discharge the individual from work.
   2. The individual’s substantial control over, or economic benefits from, the reporting company are derived solely from the employment status of the individual as an employee.
   3. The individual is not a senior officer of the reporting company. The term “senior officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, or chief operating officer, or any other officer, regardless of official title, who performs a similar function. 
4. Inheritor -  the individual’s only interest in the reporting company is a future interest through a right of inheritance, such as through a will providing a future interest in a company.
5. Creditor - the individual is a creditor of the reporting company. The term “creditor” means an individual who would meet the definition of a beneficial owner of the reporting company solely through rights or interests for the payment of a predetermined sum of money, such as a debt incurred by the reporting company, or a loan covenant or other similar right associated with such right to receive payment that is intended to secure the right to receive payment or enhance the likelihood of repayment. For example, an individual qualifies for the creditor exception if the individual is entitled to payment from the reporting company to satisfy a loan or debt, so long as this entitlement is the only ownership interest the individual has in the reporting company.