Indirect vs. Direct Ownership Interest

A “reporting company” is what FinCEN calls a company that is required to report its Beneficial Ownership Information (or BOI).  But, who is a Beneficial Owner?  There are two broad categories of Beneficial Owners:  Those who exert “Substantial Control” over a reporting company, and those who own or control 25% or more of the “Ownership Interest” of a reporting company.

But, what exactly is an “Ownership Interest”?  If you click on the link, you’ll be taken to a blog article that explains what ownership interest is, and it goes into some detail on direct versus indirect ownership.

However, the concept of Indirect versus Direct Ownership Interest is important to understand, and it can lead to some very strange results when determining who the Beneficial Owners are in a reporting company.  This blog article attempts to explain the issues in more depth.

Direct Ownership is What You Think is Ownership

There is nothing complicated or confusing about direct ownership.  Direct ownership of a reporting company represents ownership by individuals, trusts, companies or other entities.  It’s really that simple.

What makes things complicated, is the fact that Beneficial Owners can only be individuals.  This means that when non-individual parties (i.e. trusts, companies or other entities) directly own a reporting company, we need to look further — specifically we need to know more about such parties, and specifically, the individuals related to them and who exert the power, control or facilitate the benefits of direct ownership of the reporting company by such non-individual parties.

Direct ownership, then, isn’t the only factor in determining whether someone exceeds the 25% ownership threshold.

Indirect Ownership is Non-Individual Direct Ownership Attributed to Individuals

I bet, when you first read that heading, it didn’t make a lot of sense.  Hopefully, after reading further, it will make perfect sense to you.

Indirect ownership refers to those individuals who have a relationship with a non-individual party maintaining a direct ownership interest in the reporting company, and because of their status to that non-individual party, exert some level of influence, power or control over the reporting company, or otherwise receive some sort of benefit.

How this works, depends on the type of non-individual party we’re talking about.  There are three possibilities:

• Trust.  FinCEN says that individuals may hold ownership interests (i.e. an indirect ownership interest) in a reporting company through a trust or similar arrangement:
  • A trustee or other individual with the authority to dispose of trust assets.
  • A beneficiary who is the sole permissible recipient of trust income and principal or who has the right to demand a distribution of or withdraw substantially all of the trust assets.
  • A grantor or settlor who has the right to revoke or otherwise withdraw trust assets.
• Company.  FinCEN (by way of examples, starting on Page 27 of its Small Entity Compliance Guide, December 2023 – Version 1.1), indicates that owners of companies who maintain a direct ownership interest in a reporting company can be indirect owners of the reporting company, in proportion to their ownership interest in the owning company.
• Other Entities.  FinCEN offers little guidance here, but it is assumed individuals depending on their relationship to such other entities, could be beneficial owners of the reporting company.

For trusts, all such trustees, beneficiaries, grantors and/or settlors can be said to maintain an indirect ownership interest in the reporting company, and that means their respective indirect ownership amounts would be equal to the direct ownership the trust maintains in the reporting company.  In other words, if the John Doe Family Trust owns 50% of a reporting company, then the trustee of the trust would indirectly own the reporting company 50%, as would any co-trustee, the beneficiary, and any appropriate grantor or settlor.

For companies, if Company A owned 50% of the reporting company, and John Doe owned 50% of Company A, then John Doe would be said to have a 25% indirect ownership interest in the reporting company.  If instead, John Doe owned 50% of Company B, which in turn owned 100% of Company A, and Company A owned 50% of the reporting entity, John Doe still owns a 25% indirect ownership interest in the reporting company.  The math is 50% x 100% x 50%, which equals 25%.

This should tell you that no matter how many companies own each other, you need to look at the entire ownership chain, to determine how the indirect ownership falls to the reporting company.

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