Starting from January 1, 2024, any corporations, limited liability companies (LLCs), and other entities established in the United States through the submission of a document to the secretary of state or a comparable office or formed in a foreign country and authorised to conduct business in a state through the submission of a document to a secretary of state or similar office must, unless exempted, submit a report on Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network.
Under the Corporate Transparency Act (CTA), the Beneficial Ownership Information (BOI) report is mandated by federal law. The report, which must be comprehensive, discloses essential details about all beneficial owners of a company. Failure to submit a thorough report can lead to substantial civil and criminal penalties.
Adhering to the BOI reporting obligation necessitates comprehending the meaning of a “beneficial owner” under the CTA. The final reporting rule, established by FinCEN to implement the BOI reporting requirements outlined in the CTA, delves into the specifics of this definition.
What constitutes a beneficial owner?
For a reporting company, which refers to any entity obligated to submit a BOI report, a beneficial owner is identified as an individual who, either directly or indirectly, possesses substantial control over the reporting company or holds or controls a minimum of 25 percent of the ownership interests in the reporting company.
What qualifies as “substantial control”?
An individual is liable to exercise substantial control over a reporting company if the individual:
A) Holds a senior officer position;
B) Wields authority concerning the appointment/removal of any senior officer/majority of the board of directors (or a similar body);
C) Directs, determines, or significantly influences crucial decisions made by the company, encompassing choices related to:
(1) The nature, extent, and attributes of the business, such as the sale, lease, mortgage, or other transfer of its principal assets;
(2) The reorganisation, dissolution, or merger of the company;
(3) Significant expenditures or investments, equity issuances, incurring substantial debt, or approval of its operating budget;
(4) The selection/termination of business lines or ventures, or geographic focus;
(5) Compensation structures and incentive programs for senior officers;
(6) The initiation or termination, or the fulfilment or non-fulfilment, of significant contracts;
(7) Amendments to substantial governance documents and important policies or procedures; or
(D) Holds any other form of substantial control over the reporting company.
What defines a senior officer?
The designation “senior officer,” concerning the assessment of substantial control, refers to any individual occupying the role or wielding the authority equivalent to that of a:
- President,
- Chief Financial Officer,
- General counsel,
- Chief Executive Officer,
- Chief operating officer,
- Or any other officer with a similar function, irrespective of their official title.
Control can manifest either directly or indirectly. An individual may exert control directly or indirectly, which includes serving as a trustee of a trust or a comparable arrangement, through:
A) Representation on the board;
B) Ownership or command of a majority of the voting power or voting rights;
C) Entitlements associated with any financial arrangement or interest in a company;
D) Domination over one or more intermediary entities that, individually or collectively, wield substantial control over a reporting company;
E) Agreements or financial or business connections with other individuals or entities functioning as nominees or
F) Any other contract, arrangement, understanding, relationship, or similar means.
How is “ownership interest” defined?
The term “ownership interest” encompasses:
A) Any equity, stock, or similar instrument; pre-organisation certificate/ subscription/transferable share of/voting trust certificate/certificate of deposit for an equity security, interest in a joint venture/certificate of interest in a business trust (irrespective of its transferability, classification as stock or a similar asset, or provision of voting power or voting rights);
B) Any capital or profit interest;
C) Any instrument convertible into any share or instrument described in (A) or (B), any future on any such instrument/any warrant or right to purchase/sell/subscribe to a share or interest described in (A) or (B), regardless of whether characterised as debt;
D) Any put, call, straddle, or other option/privilege of buying/selling any of the items described in (A), (B), or © without an obligation to do so, unless created and held by a third party/third parties without the knowledge or involvement of the reporting company;
E) Any other instrument/contract/arrangement/understanding, relationship/mechanism to establish ownership.
Ownership can be either direct or indirect
An individual may possess or influence an ownership interest in a reporting company directly or indirectly through any contract, arrangement, understanding, relationship, or other means, including:
A) Co-ownership with one or more other individuals, sharing an undivided interest in that ownership interest;
B) Utilising another individual as a nominee, intermediary, custodian, or agent, representing them in this capacity;
C) Serving as a trustee, grantor, settlor, or beneficiary of a trust or a comparable arrangement that holds the said ownership interest;
D) Exerting control or ownership over one or more intermediary entities or having control or ownership of the ownership interests of such entities, which individually or collectively possess or control ownership interests in the reporting company.
Who is excluded from being a “beneficial owner”?
The term “beneficial owner” does not encompass:
A) A minor child, given that the reporting company discloses the required information about a parent or legal guardian;
B) An individual serving as a nominee/intermediary/custodian/agent on behalf of another individual;
C) An employee of a reporting company, functioning solely in an employment capacity, whose significant control over or economic benefits from the entity is derived exclusively from their employment status, provided they are not a senior officer;
D) An individual whose sole interest lies in a future interest through a right of inheritance;
E) A creditor of a reporting company.
What details regarding beneficial owners are required for reporting?
In its BOI report, a reporting company is obligated to furnish the following personal and identifying information for each of its beneficial owners:
- Legal name
- Date of birth
- Residence address
- Identifying number and issuing jurisdiction from a driver’s license, passport, or another authorised document
- An image of the document containing the aforementioned number.
When is the deadline for submitting the initial report containing beneficial owner information?
For reporting companies established or registered before January 1, 2024, the filing period opens on January 1, 2024, and the report must be submitted by January 1, 2025.
Reporting companies formed or initially registered between January 1, 2024, and January 1, 2025, are required to file their initial report within 90 days from the date of receiving actual or public notice of their formation or registration.
Reporting companies established or initially registered on or after January 1, 2025, must file their initial report within 30 days of receiving actual/ public notice of their formation or registration.
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Originally published at https://www.inkle.io.