What is the Difference Between a Beneficial Owner and a Shareholder and Whose Information Needs to be Provided in BOI Reporting?

The new Beneficial Ownership Information (BOI) reporting requirements, in effect since January 1, 2024, mandate that certain companies, including corporations and limited liability companies, report information about individuals who own or control the business to the Financial Crimes Enforcement Network (FinCEN). These individuals are identified as "Beneficial Owners". These BOI reporting requirements aim to enhance corporate transparency and combat illegal activities such as money laundering, terrorism financing, and tax fraud. However, determining who qualifies as a beneficial owner can be complex, as it may involve identifying individuals who ultimately own or control the company, whether directly or indirectly. The reporting obligations are placed on the business entities themselves and not the individual owners or shareholders. Companies that must submit reports about who owns and controls them are referred to as "Reporting Companies." Reporting companies must provide general information about the company and the individuals who own and control it. It is essential for affected businesses to understand and comply with these new requirements to avoid potential penalties and legal consequences.

In this article, we will examine who exactly qualifies as a "Beneficial Owner" and whether or not shareholders need to provide their individual information in order for the business to comply with the Beneficial Ownership Information reporting requirements.

What is the Difference Between a Beneficial Owner and a Shareholder?

The key difference between a shareholder and a beneficial owner lies in their relationship to the shares of a company. A shareholder is the person in whose name the shares are registered, as per the official records. However, a shareholder may not always be the ultimate beneficial owner. The beneficial owner, ultimately, is the person who enjoys the benefits of ownership, either directly or indirectly and has the power to vote or otherwise influence the transaction decisions regarding a specific security, such as shares in a company. While the shareholder may hold shares in their own name, they may at the same time hold those shares on behalf of another person on a contractual basis, making that other person the actual, ultimate beneficial owner. This distinction is important in cases of nominee shareholding, where the nominee shareholder acts as a stand-in for the beneficial owner, who retains the full economic interest and risk in the underlying business.

What Are the Challenges of Determining Who is a Beneficial Owner?

Determining who is a beneficial owner poses several challenges, particularly in the context of identifying individuals who ultimately own or control a company, either directly or indirectly. One key challenge is the complexity of account structures, which can obscure the true beneficial owner. Additionally, the ability to identify the ownership percentage of each relevant individual is equally challenging, especially when dealing with a web of ownership interests. The legal definition of a beneficial owner, which includes individuals with significant control over a company, further complicates the identification process. Moreover, the use of legal entities and trusts for ownership can obfuscate the true beneficial owner. These challenges underscore the difficulty of reliably identifying beneficial owners despite the importance of this information in the context of financial regulations and law enforcement efforts.

Who Does FinCEN Consider to be a Beneficial Owner?

FinCEN considers a beneficial owner to be any person who, either directly or indirectly, (1) holds substantial control over a reporting company or (2) owns or controls a minimum of 25 percent of the ownership interests in the reporting company. This rule defines the terms "substantial control" and "ownership interest" utilizing various criteria. Generally speaking, substantial control indicates having authority, a high degree of influence, and decision-making ability within the company. Therefore, under this definition, a shareholder who owns less than 25 percent of the company and does not have substantial control over the company may not be identified as a beneficial owner, and the reporting company would not need to report their personal information to FinCEN. However, shareholders that hold 25 percent or more of the company or do have substantial control, regardless of their ownership interests, may be considered beneficial owners.

Examples of individuals who exercise "substantial control" over a reporting company could include:

• Senior Officer
• Appointment or Removal Authorities
• Critical Decision-Makers

Examples of individuals who control at least 25 percent of a reporting company's ownership interests could include:

• Individuals Who Hold Shares of Equity
• Stockholders
• Individuals Who Hold Voting Right
• Individuals Who Hold Capital or Profit Interes

It is important to note that FinCEN has created some beneficial owner exemptions, and additionally, not every individual would be considered a beneficial owner or fall under the category. For more details on these beneficial owner exemptions and exceptions and the established rules that apply to them, it is advisable to refer to FinCEN's Small Entity Compliance Guide.

Beneficial Ownership Information Report Due Dates

BOI report due dates depend upon when the company was first formed and registered.

• Reporting companies based in the United States or foreign reporting companies that have been registered to operate in the United States before January 1, 2024, must submit their initial Beneficial Ownership Information (BOI) report to FinCEN by January 1, 2025.
• Reporting companies based in the United States or foreign reporting companies that have been registered in the United States for the first time on the day of or after January 1, 2024, are obligated to submit their initial BOI report with FinCEN within 90 days of their creation or registration date.

The Takeaway:

Beneficial Ownership Information (BOI) reporting requirements, effective January 1, 2024, mandate that certain business entities, known as "Reporting Companies," disclose information about individuals owning or controlling the businesses to the Financial Crimes Enforcement Network (FinCEN). Termed "Beneficial Owners," these individuals are defined by FinCEN as having (1) "substantial control" over the company or (2) "ownership interests" of at least 25 percent in a reporting company. This means that shareholders who hold over 25 percent of the company may be considered beneficial owners and the reporting company will have to submit the requested information to FinCEN. Shareholders who own less than 25 percent of a company may not be considered beneficial owners unless they have "substantial control" in a company, greatly or to a high degree influencing its decision-making and operations.

So, it depends on what percentage a shareholder owns and whether or not they hold substantial control in the company as to whether or not the reporting company will need to include them in the BOI report. It is important to state that FinCEN has created certain beneficial owner exemptions and that not every individual is automatically regarded as a beneficial owner or will fall into that category. For comprehensive information regarding these exemptions, exceptions, the specific regulations governing them and how they might apply to you, it is recommended to reference FinCEN's Small Entity Compliance Guide.

InCorp's Commitment

InCorp understands that these regulatory changes can bring a significant amount of confusion and uncertainty to business owners. As an industry leader in business services, we are committed to helping companies navigate these challenges successfully and stay in compliance with new business regulations and requirements.

Learn More in Related Help Articles:

• What are the Beneficial Ownership Information Requirements?
• What is BOI / Beneficial Ownership Information?