The Corporate Transparency Act’s Final Rule Clarifies Who Qualifies as an Entity’s “Beneficial Owner” and Whose Identify and Information Must Be Disclosed to the Federal Government
The September 29, 2022, issuance of a Final Rule implementing the Corporate Transparency Act (CTA) has started the compliance clock ticking for an estimated 36 million entities. The CTA imposes new mandatory, detailed, and complicated reporting obligations focused on identifying an entity’s “beneficial ownership information” (BOI). Our previous post on the CTA Final Rule discussed the process of determining whether an entity is a “Reporting Company” that must comply with the law’s disclosure requirements. This post examines the nature and extent of those obligations, who qualifies as a “Beneficial Owner,” and what specific information Reporting Companies must disclose under the CTA.
Reporting Companies subject to the CTA will soon need to provide the following baseline information to the Financial Crimes Enforcement Network (FinCEN):
- The entity’s legal name (including any d.b.a.).
- Its business address.
- Its tax identification number.
- The jurisdiction in which it was initially formed or incorporated.
Beyond these simple disclosures, the BOI that Reporting Companies must provide FinCEN focuses on two broad categories of individuals: “Applicants” and “Beneficial Owners.”
Information About Company Applicants
The Final Rule defines a “company applicant” as “the individual who directly files the document that first creates the domestic reporting company” as well as “the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.” The definition of company applicant is limited to either one or two (but no more) individuals and is likely to include attorneys and paralegals if entities are formed by law firms. Reporting Companies created before January 1, 2024, do not need to report Company Applicant information, and changes to Company Applicant information do not need to be updated, assuming the information was correct when first reported.
Identifying an Entity’s “Beneficial Owner”
Perhaps the biggest compliance challenge for Reporting Companies is correctly and thoroughly identifying all “Beneficial Owners” whose information they need to disclose.
The Final Rule defines a “Beneficial Owner” as any individual who, directly or indirectly, either:
- Exercises substantial control over a reporting company; or
- Owns or controls at least 25 percent of the ownership interests of a reporting company.
This is an either/or test, meaning that either owning a 20% interest or meeting the “substantial control” test makes one a Beneficial Owner of a Reporting Company. The upshot is that corporate officers may be deemed “Beneficial Owners” even if they do not hold equity (because they may exercise “substantial control,” as discussed below).
Notably, the ownership test includes direct or indirect ownership, meaning that ownership through intermediary entities counts as ownership of the Reporting Company. FinCEN will “look through” intermediary holding companies to the individuals who ultimately own Reporting Companies “indirectly.” Stated differently, an individual may be a beneficial owner “through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.”
As outlined in the Final Rule, “ownership interests” that could make an individual a Beneficial Owner include equity in the entity and other types of interests, such as capital or profits interests, convertible instruments, warrants or rights, or other “options or privileges to acquire equity, capital, or other interests.” Debt instruments are “ownership interests” if they enable the instrument holder to exercise the same rights as one of the other specified types of equity—including if they are convertible. The Rule also provides specific criteria for calculating ownership percentages—broadly stated as “a percentage of the total outstanding ownership interests of the reporting company,” treating all options as exercised.
The other characteristic that could qualify someone as a “Beneficial Owner” under the CTA is exercising “substantial control” of the company. Under the Final Rule, an individual has “Substantial Control” over an entity if they possess combinations of either de jure or de facto authority, including an individual who:
- 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) of the reporting company; or
- Directs, determines, or has substantial influence over important decisions made by the reporting company, including, for example:
- Entry into and termination of contracts.
- Acquisition, sale, or lease of the company’s principal assets.
- Reorganization, dissolution, or merger.
- Selection or termination of business lines or venture.
- Amendment of any governance documents of the reporting company.
Covered entities must provide all the following information regarding Applicants and Beneficial Owners:
- Full legal name.
- Date of birth.
- Street addresses (identified as a current residential or business street address).
- Non-expired state identification document or passport.
Timing of Required Disclosures
The Final Rule is effective January 1, 2024. Any Reporting Company created on or after January 1, 2024, must report its BOI within 30 calendar days of its creation, while entities created before January 1, 2024, must provide their BOI to FinCEN by January 1, 2025. If a company was previously exempt from the CTA but becomes a Reporting Company, it must file its BOI with FinCEN within 30 days after it no longer meets the exemption criteria and must similarly report any other change to BOI within 30 days of the applicable change.
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