By Brian Calley, SBAM President & CEO
If you own a small business, you are likely approaching a reporting deadline for the Corporate Transparency Act (CTA). If you don’t know what this is check out this article we recently published that lays out what it is, who needs to file and, when you need to file.
SBAM followers will know we have two tracks on the CTA. We want to make sure you are in the best position to comply with this requirement before the deadline for your first report. But we are also challenging this new requirement in Federal Court as we believe it to be a violation of the 4th, 5th and 10th amendments to the U.S. Constitution.
Our lawsuit was filed in the Spring of this year and while there have been written briefs back and forth through the summer on this case, oral arguments will not be held until December 16, 2024. We are not certain if we will see a decision yet this year, so we want to be very clear: absent a win in court that also comes with some sort of injunction, you will need to file. (For most businesses the deadline for the first filing is 12/31/24).
This begs the question: Should you go ahead and file now or wait to see if we get a late decision on the lawsuit? That partly depends on your risk tolerance. You might want to go ahead and file just for peace of mind. But for many businesses, compliance very late in the year won’t be a problem. The filing itself is not the hard part. Depending on the complexity of your business, you might need some guidance regarding who the government considers to be a “beneficial owner.”
Defining a Beneficial Owner
Naturally, the definition of “beneficial owner” includes those who actually have ownership in the business, but the definition is more expansive than that. Consider this description from an article we recently published:
A “beneficial owner” is any individual who, directly or indirectly:
- Exercises substantial control over the reporting company (e.g., through service as a senior executive such as CEO, CFO or general counsel or through other authority to make substantial decisions on behalf of the entity);
- Owns or controls 25% or more of the ownership interests of the reporting company; or
- Owns or controls a majority of the voting equity in the reporting company.
“Substantial control” and “ownership interests” are broad terms encompassing a wide variety of individuals, not just those with equity or vested equity in the entity.
Your business might be structured such that those who exercise “substantial control” are limited and quite obvious. In that case, you might feel comfortable waiting and filing yourself if need be. But if your business is more complex with significant delegated authority to others, you might need to dig in a little deeper and perhaps seek legal advice. If that is the case, you probably do not want to wait much longer to at least decide who you are going to report as a beneficial owner.
Types of Control
Here are some broad categories of types of control that may require reporting as a beneficial owner, even for people without ownership or voting equity:
- Operational Control: Direct or indirect ability to dictate major decisions, like management policies, hiring/firing key employees, or determining business strategies.
- Control Over Key Decision Making: Influence over decisions such as entering or exiting markets, significant contracts, or changes in business structure.
- Control Over Financial Decisions: Authority to approve budgets, major transactions, or make financial commitments.
- Control Through Other Means: This could be through personal influence, familial relationships, or contractual arrangements that might not be immediately obvious.
This is one of the reasons we are so concerned about the CTA. It is hard to know for sure who the government will consider a “beneficial owner.” Even in a very small business, it might not be clear. Here are some questions to consider to determine if a non-owner fits the definition of a beneficial owner – and these are not exhaustive:
- Is someone who is not an owner effectively running the company or making strategic decisions?
- Does anyone hold significant sway over the board of directors or are on the board of directors without ownership?
- Do you have contracts or agreements where a non-owner has veto power or significant influence over decisions?
- Is there a family member or close associate of an owner who, despite not having legal ownership, controls operations or makes significant decisions?
- Is there a former owner in the mix? Sometimes, founders or former major shareholders might retain control or significant influence post-sale or during a transition phase.
Additional Resources:
Reading this article is not a substitute for legal advice. You might have the sort of structure where the identification of beneficial owners is obvious to you. But if there’s ambiguity about whether someone should be reported as having substantial control, you really should seek legal advice or err on the side of inclusion of potential beneficial owners in your filing rather than exclusion from your reporting. Especially since the penalties for non-compliance can be severe.
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