Understanding the requirements for identifying beneficial owners of a reporting company is crucial for compliance with the Financial Crime Enforcement Network (FinCEN) guidelines. In order to prevent possible financial crimes and maintain the transaction it is crucial to properly identify and document the details of beneficial owners.
In this article, I will take you through the essentials of identifying beneficial owners for reporting companies. I will be explaining what substantial control and ownership interest means, and outline the steps to determine beneficial owners. I will highlight those not considered beneficial owners and show how TaxBandits can simplify your BOIR filing process.
What Does Beneficial Owners Mean?
The answer to the question of what a Beneficial owner means can be traced from the definition by the Financial Crimes Enforcement Network (FinCEN). It defines a beneficial owner of a reporting company as any individual or entity that directly or indirectly exercises:
1. Substantial control over the reporting company
2. Owns or controls 25% or more of the ownership interest in the reporting company.
Note: A reporting company can have an unlimited number of beneficial owners. It means there is no limit to the number of beneficial owners a reporting company can have.
What Does Substantial Control Mean?
The reporting companies need to identify all the individuals who have substantial control over a reporting company. If an individual satisfies any of the following mentioned conditions, then the individual has substantial control:
1. Senior Officer: The senior officer is the person who holds a key position. The key positions include CFO, CEO, general counsel, or president.
2. Appoint or Remove Authority: The person can have the authority to appoint or remove any of the company’s officers, such as the board of directors with similar positions in the reporting company.
3. Decision Maker: A Decision Maker is entitled to make an important decision regarding the company’s finances, business operations, and structure.
4. Other Significant Control: The person has any other significant control over a reporting company. This control can be applied in different ways, and also it can still be considered substantial.
What is Ownership Interest?
The companies are required to determine the individuals who own or control 25% of the ownership interest over a company. The companies may have different types of ownership interest, which include:
1. Stock or grants voting rights or voting power
2. Every stake in the company’s reported assets or earnings.
3. Each convertible instrument
4. A variety of instruments, contracts, arrangements, or relationships used to establish ownership
Steps and Ways to Identify the Beneficial Owners of a Reporting Company
There are multiple steps and ways to identify the beneficial owners of a Reporting company. Follow these steps to identify the beneficial owner of the reporting company.
Step 1
Determine the individuals who either directly or indirectly have substantial control. Here is what you need to look for:
1. Direct ways:
- Representation of Boards
- Voting Powers or rights of the authority or owner
- Rights associated with financing or stack.
2. Indirect Ways:
- Controlling one or more intermediary entities
- Through arrangements, finances, relationships, or otherwise.
Step 2
Determine the individuals who either directly or indirectly own or control the ownership interest and also determine the company’s ownership interest type:
1. Direct ways:
- Sharing ownership interest with multiple individuals.
2. Indirect ways:
- Own or control one or more intermediary companies or take ownership interest in any intermediary companies.
- Through another person referring as a nominee, intermediary, custodian, or agent.
Step 3
After determining what type of ownership interest is appropriate for your company and who owns or controls it, you must identify who has more than 25% ownership interest in the company.
Who is Not Considered the Beneficial Owner?
When the person is qualified as an exception from the BOI Reporting, the reporting companies are not required to provide the information in the BOI report.
The individuals listed below are not considered as the beneficial owners:
1. Minor Child
The details of the minor child have not been provided, and instead, the information of the parent or guardian has been submitted. Furthermore, once the child comes of age, this exception will no longer be valid, and the reporting company will need to submit the revised beneficial ownership information during that time.
2. Nominee, Intermediary, Custodian, or Agent
An individual who holds the position of nominee, intermediary, custodian, or agent can not be considered the beneficial owner since the statute is silent about it and does not confer them with the said ownership.
3. Employee
An individual who has served as a full-time employee in the reporting company and is not to be employed in a higher position such as senior officer, CEO, CFO, or President is also not considered a beneficial owner.
4. Inheritor
An individual expresses a future interest in a reporting company through inheritance rights. Once the individual invests their interest, this exemption no longer applies and the individual becomes the beneficial owner of the reporting company.
5. Creditor
An individual is required to make a payment from the business to satisfy a loan or debit. A credit therefore is exempted from the list of beneficial owners.
Wrapping Up
So it has come to the fore that determining the beneficial owner of a reporting company can be a complex and detailed process. The guidelines in this article are designed to help you help you handle this challenge by clearly defining substantial control, ownership interests, and the steps needed to identify beneficial owners accurately.
Understanding who controls or owns your company is essential for meeting legal requirements and ensuring transparency. Once you have identified the beneficial owners, promptly filing the Beneficial Ownership Information (BOI) report with the FinCEN department is crucial. This ensures compliance with legal standards and helps maintain the integrity of financial reporting. Taking these steps seriously will support both legal compliance and the overall trustworthiness of your company.
