Who is a Beneficial Owner Based on Substantial Control? ​

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Part 6

Who is a Beneficial Owner Based on Substantial Control?

In spite of the name “Beneficial Owner,” the term is far broader than simply including direct and indirect owners, and may include directors, officers, employees, creditors, and others, and individuals There is no limit on the number of people who could be considered Beneficial Owners, no matter how small the company. For many companies, determining Beneficial Ownership will be a simple reference to their ownership table and organization chart. For others, unfortunately, it will be a time consuming, tedious and expensive process.

A Beneficial Owner is:

• Any individual who directly or indirectly owns or controls at least 25% of the ownership interests in the company, or
• Any individual who has substantial control over the company.

Below we break down how to determine who is a Beneficial Owner based on substantial control.

Who has “Substantial Control”?

After determining who is a Beneficial Owner with respect to ownership interests, you’ll need to identify those that are Beneficial Owners based on “Substantial Control.”

• “Substantial Control” means any individual who exercises any form of substantial control over the company unless an exception applies. Specific examples include:
  • Senior officers (defined below)
  • An individual with the authority to appoint or remove any senior officer
  • An individual with the authority to appoint or remove a majority of the board (or similar body)
  • An individual who directs, determines or has substantial influence over important decisions made by the company, including any of the following:
    • “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; or
    • 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.”
    • Senior Officers: Any individual who holds the following positions is a senior officer, and will be considered to have substantial control and therefore is a Beneficial Owner.
    1. • President
       • Chief financial officer
       • General counsel
       • Chief executive officer
       • Chief operating officer
       • Any other officer who performs similar function as any of the specific roles listed above

    Exceptions to Substantial Control:

    If an individual meets any of the following exceptions, they will not be considered a Beneficial Owner with respect to substantial control (they may still be a Beneficial Owner with respect to ownership interests).

    • Minor child (if a parent or guardian is reported). If the individual is legally considered a minor in the jurisdiction the company was created in, and if a parent or legal guardian’s information is reported instead.
    • Some Employees. Except for the company’s senior officers, an exception applies to an employee if their substantial control and economic benefits from the company solely result from their employment status as an employee.
    • Some Heirs. The individual’s only interest in the company is derived from a future interest through a right of inheritance.
    • Some Creditors. The individual only meets the definition of a Beneficial Owner because it is a creditor with respect to repayment of a predetermined sum of money, and the rights in question, such as a loan covenant or other term that secures payment are solely to improve likelihood of being repaid, or secure payment.
    • Nominee, intermediary, or agent (if the actual Beneficial Owner is reported). The individual merely acts on behalf of a Beneficial Owner as their agent, and the actual Beneficial Owner’s information is reported instead.

    Notice These resources do not address how the CTA applies to foreign companies and foreign individuals. For more information on how the CTA applies to foreign companies and foreign individuals, please visit https://www.fincen.gov/boi

    These resources are provided for general informational purposes only, and are not legal advice. These resources do not form an attorney-client relationship.