For Your Benefit

We have discussed the reporting requirements of the Corporate Transparency Act in a November post and a January post. The reporting requires the names, addresses, birth dates, and identification numbers from a driver's license or passport of the beneficial owner(s). A beneficial owner is defined as any individual who, directly or indirectly, either (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 substantial control has sparked many questions for reporting companies.

The Beneficial Ownership Reporting Rule of the Corporate Transparency Act sets forth a variety of actions that could establish substantial control of a reporting company. This approach is intended to make it difficult to obscure decision-makers within a vague corporate management structure.

Individuals that fall into any one of these four categories are deemed to exercise substantial control:

  1. A senior officer (president, chief executive officer, chief financial officer, chief operating officer, general counsel, or a person who performs similar functions but without the title).
  2. Anyone with authority to appoint or remove certain officers or a majority of directors.
  3. Important decision-maker(s), such as those who direct, determine, or have substantial influence over product offerings, geographic locations, sale of principal assets, major expenditures or investments, compensation plans of senior officers, corporate reorganization, mergers, and/or amendments to governing documents.
  4. Individuals with any other form of substantial control.

According to the Financial Crimes Enforcement Network of the US Department of Treasury, “Control exercised in new and unique ways can still be substantial. For example, flexible corporate structures may have different indicators of control than the indicators included” above.

Reporting companies with simple organizational structures should be able to easily identify and report its beneficial owners, which is likely the majority of reporting companies. Those with more complex structures, however, will need to more closely examine the “control” function to determine and report its beneficial owners.

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