Corporate Transparency Act Beneficial Ownership Information Reporting is now open to business entities formed in U.S.
By: Matt Dochnal

What is Beneficial Ownership?

Starting in 2024, U.S. businesses must report their beneficial ownership information to comply with new federal regulations. The Corporate Transparency Act (CTA) and Beneficial Ownership Information Reporting (BOIR) introduce a lot of new legal language that business owners need to learn.

What exactly is beneficial ownership? In this article, we break down what you need to know about beneficial ownership to help you understand FinCEN’s BOI Reporting requirements.

What is Beneficial Ownership and BOIR?

“Beneficial ownership” refers to the majority control over a business. FinCEN’s definition of beneficial ownership has two categories: ownership and control.

A person has beneficial ownership in a business either by:

  • Owning or controlling at least 25% of the company’s ownership interest, or
  • Having “substantial control” over important business decisions.

People with “substantial control” include a company’s senior officers, anyone who can appoint or remove directors, or any key-decision makers involved with the business. 

The Corporate Transparency Act (CTA), a U.S. federal law, mandates businesses to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Companies accomplish this by filing a Beneficial Ownership Information Report, or “BOIR”, with FinCEN. The BOIR requires personal information about all the beneficial owners and company applicants.

What is an Ownership Interest?

Ownership interest refers to arrangements that give someone ownership rights or control over a company. There are many different kinds of ownership interest, including:

  • Stock in a corporation,
  • Stock options,
  • LLC membership interests,
  • Voting rights, and
  • Profit interests.

These examples are the most common ways an individual can hold an ownership stake in a company, either directly or indirectly.

What is Substantial Control?

FinCEN defines “substantial control” as the ability to influence important company decisions. Individuals with substantial control may have influence over a company’s business strategy, finances or organizational structure. 

Senior officers, general counsel, and board of directors are considered beneficial owners because of the control level they have in a company. However, anyone can be a beneficial owner by exercising substantial control, no matter their position or title. 

Types of Ownership Interests for BOIR

You need to know about the different forms of ownership interest to fully understand beneficial ownership. Here’s a breakdown of some types of ownership interests someone may have in your company.

1. Direct Ownership Interest

Direct ownership interests include stock, equity, membership interest or voting rights. People with direct ownership are often significant shareholders in a corporation or members in an LLC.

Owning at least 25% of a business’s total equity qualifies someone as a beneficial owner who needs to be reported to FinCEN.

2. Stock Options 

Stock options refer to agreements like puts, calls, or other types of options contracts. These  contracts grant someone the right to acquire equity or ownership in a company at a future date.

All agreements for future ownership, like stock options, should be treated as beneficial ownership, even if the contracts are not effective yet.

3. Capital and Profit Interests

This category includes different types of financial benefits, like a share in an LLC’s profits or interest in a company’s assets. 

Passive investors in LLCs often hold these interests. For example, an individual might receive a portion of an LLC’s profits without holding any control or having voting rights within the company.

Nonetheless, if their profit interest amounts to 25% or more of the company’s total value, they are considered a beneficial owner.

Determining someone’s beneficial ownership status can be complicated if their profit interest does not match their ownership share or when the company’s true value is uncertain.

4. Innovative Agreements; SAFES AND KISSs

SAFES (Simple Agreement for Future Equity). KISSs (Keep It Simple Security), and other similar agreements count towards beneficial ownership. Startups often use these agreements to promise future ownership stakes to investors.

Reporting companies should count these agreements as if they are in effect. Any investors who have a right to own or control 25% of the company at any point in the future are considered beneficial owners. 

5. Arrangements for Future Rights to Equity 

Agreements promising the chance to buy or sell shares in the future play a big role in figuring out who really owns or controls a company. These include things like warrants, which are basically promises for future ownership or shares. 

6. Indirect Ownership via Other Entities

Beneficial owners might have control over your company indirectly through another entity, like a holding company or a trust. 

These individuals are beneficial owners if they indirectly control 25% of your company’s ownership interest. 

Reporting companies need to look through any other entities in their ownership structure and report the ultimate beneficial owners at the top. 

How to Calculate Beneficial Ownership

To figure out who the beneficial owners are, consider all the different ways someone might have a stake in the company. If someone’s control or ownership amounts to 25% or more of the total company interest, they must be reported in the company’s BOI Report.

For example, consider someone who has different types of investments in a company. First, they directly own 10% of the company’s shares. Additionally, they control another 10% of the ownership through a holding company. Finally, they hold stock options that, if exercised, could result in owning an extra 5% of the company’s shares.

When you tally it up—10% direct ownership, 10% through the holding company, and 5% from stock options—you reach a total of 25%. This combination of direct, indirect, and potential ownership qualifies the investor as a beneficial owner.

Who Has Beneficial Ownership in a Corporation?

Here’s a look at who qualifies as a beneficial owner in a corporation:

25% Shareholders

Any individual owning 25% or more of a company’s stock is a beneficial owner. 

This includes people who control shares indirectly through entities like holding companies or trusts.

Senior Officers and Directors 

Senior officers and board members who have substantial decision-making power are beneficial owners. A company’s CEO, CFO, COO, General Counsel, and anyone else with a similar title need to be reported for BOIR.

People with Substantial Control

Anyone with influence over business strategy, finances or operational decisions has substantial control over the company and needs to be reported as a beneficial owner. 

Stock Options 

Individuals owning stock options granting them potential future equity can qualify as beneficial owners. This can include employees given stock options as part of their compensation plans.  

Owners of stock options only need to be reported if the future equity is equal to 25% or more of the total ownership interest in the company.

Who Has Beneficial Ownership in an LLC? 

Here are the people you need to include in a BOI Report for an LLC:

25% Members 

LLC Members with 25% or more of the total Membership interests are beneficial owners. 

This includes anyone with a right to membership interest through any type of conditional agreements, like buy-out provisions. These conditional agreements need to be considered towards beneficial ownership as if they are effective today. 

Managers and Important Decision-Makers

Individuals who can make important decisions for the LLC, like senior managers or other key figures with control over the LLC’s strategic, financial, or operational directions, meet the criteria for beneficial ownership due to their substantial control.

Investors with Capital or Profit Interests 

Anyone benefiting financially from an LLC, through either capital stake or profit shares, fits into the beneficial ownership category if their interest is 25% or more. This includes passive investors who may not participate in daily operations but receive a portion of the LLC’s profits or have an interest in its assets. 

Direct and Indirect Owners 

Individuals with a mix of direct and indirect ownership that totals 25% or more of the LLC are considered beneficial owners. This includes ownership through other entities, like trusts or holding companies. 

Business Owners vs. Beneficial Owners

The main difference between beneficial owners and business owners is how involved they are with the business. 

Business owners are typically the faces of the company. They’re involved in the day-to-day operations, make key business decisions, and are actively engaged in managing the company’s affairs. Their ownership is direct, and their names are often on the company’s legal documents, reflecting their role in the company’s operations and growth.

Beneficial owners might not be hands-on at all. Their control or influence over the company could be indirect, like owning shares through a holding company or having interests in a trust that owns part of the business.