Companies as Beneficial Owners

Companies as Beneficial Owners

FinCEN identifies four types of entities that can own companies (called “reporting companies” if they are required to report their Beneficial Ownership Information (or BOI) to FinCEN), and they are individuals, trusts, companies, and other types of entities.

Technically, Beneficial Owners can only be individuals.  Therefore, if a company has an ownership interest in a reporting company, how can that company be a Beneficial Owner of the reporting company?  The very short answer is, such a company is not a Beneficial Owner, but its Beneficial Owners can become indirect owners of the reporting company, therefore Beneficial Owners of the reporting company — if such company is not exempt as a reporting company itself (See Sect. 2.4 in FinCEN’s Small Entity Compliance Guide).

If an owning company is an exempt entity from reporting (i.e. qualifies under one of the 23 exemptions listed in Section 1.2 in FinCEN’s Small Entity Compliance Guide), then you do NOT need to follow the analysis in this blog article, and instead, you can simply report the name of the owning company versus its beneficial owners.

Otherwise, if the owning company is not an exempt entity, the rules can be complicated, so lets start with a simple example.  Let’s pretend Steve Jones owns a 50% interest in a reporting company, and the other 50% of the reporting company is owned by Acme, LLC.  Steve Jones is a Beneficial Owner of the reporting company, and unless Steve Jones can claim a exception to reporting BOI, he will have to release his information to the reporting company, so the reporting company can report Steve Jones BOI to FinCEN.

But, what of Acme, LLC?  To answer this, it’s important to understand Acme’s BOI.  FinCEN provides guidance on this, starting on Page 26, Small Entity Compliance Guide, version 1.1 December 2023, starting with Example 3.

Specifically, you need to look at the direct ownership interest held in Acme, LLC, and then apply it pro-rata to the reporting company.  Let’s assume Acme, LLC, is owned directly by two individuals, 50%/50%.  Each of these individuals is presumed to have an indirect ownership interest in the reporting company, equal to 25% (which is calculated by taking 50% of Acme, LLC, times the 50% Acme, LLC, owns in the reporting company).  Therefore, the BOI that must be reported on behalf of the reporting company in this example would be Steve Jones, plus the two owners of Acme, LLC.

Does this mean you only need to know about large owners of Acme, LLC, that could get us past the 25% threshold in direct and indirect ownership of the reporting company?  Unfortunately, the answer to this question is “no.”  To illustrate the reason for this, let’s complicate the question a bit more.

Instead of Steve Jones owning 50% in the reporting company, let’s pretend Steve Jones owns 20%, Sara Jones owns 20%, and Acme 1, LLC and Acme 2, LLC, both own 25% respectively, of the reporting company.  Now, we need to look at who directly own Acme 1, LLC, and Acme 2, LLC.  For this example, let’s pretend Steve Jones also owns 20% of Acme 1, LLC and 20% of Acme 2, LLC.  Without going further, it doesn’t look like Steve Jones owns 25% or more of any company, therefore shouldn’t have to report his BOI.

Not so fast.  Steve Jones directly owns 20% of the reporting company.  But, he also indirectly owns 5% of the reporting company through Acme 1, LLC (25% that Acme, LLC, owns of the reporting company, times the 20% in Acme, LLC, that Steve Jones owns, equals 5%), and he indirectly owns another 5% of the reporting company through Acme 2, LLC, using the same calculations as Acme 1.  This means that Steve Jones actually owns (directly and indirectly) 30% of the reporting company, and therefore must report his BOI to FinCEN.

The analysis only get more complicated, when you deal with Classes of Ownership, as well as future interests.  We won’t go into such complexities in this blog article.

In summary, the direct owners of companies that own a reporting company, are indirect owners of that reporting company, and it’s important to add up all the indirect ownership interest with the direct ownership interest, to get a total value of the Voting Power of those beneficial owners, to make a correct calculation as to whether such beneficial owners are required to report their BOI to FinCEN.

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About Laurence Donahue

Larry Donahue is the managing member of Law 4 Small Business (L4SB), a leading law firm in high-tech, small business and Internet law. Mr. Donahue possesses over 30 years of legal experience, with a focus on Internet law, intellectual property, corporate law, and contracts. Mr. Donahue has become the firm's leading attorney on Beneficial Ownership Information reporting compliance.

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