(part 1 of 3)

This series of posts follows Collin’s earlier posts on Corporate Transparency. Thank you, Collin, for paving the way! For that helpful context, please see Collin’s posts here and here. The purpose of this series is to dig a little more into the “nuts and bolts” of who must be reported, the mechanisms for the reporting, and the timing of the reports.

As Collin lays out in his earlier posts, the Corporate Transparency Act (Act) now requires “reporting companies” (read as “most companies, unless certain specific exceptions apply”) to report “beneficial ownership information.” The Act identifies a beneficial owner as any individual who, directly or indirectly meets one (or both) of the following criteria:

  1. Exercises substantial control over a reporting company, OR
  2. Owns or controls at least 25% of the ownership interests of a reporting company.

For the purposes of this post, we will focus on that first prong. The Act provides that if an individual meets any of the four criteria below, then that individual exercises substantial control:

  1. Is a senior officer
  2. Has authority to appoint or remove certain officers or a majority of directors of the reporting company
  3. Is an important decision-maker
  4. Has any other form of substantial control over the reporting company.

I personally think the first two criteria are straightforward. The first one can basically be determined based on the individual’s title. The company’s CEO? Sounds like a senior officer. The company’s janitor? Without additional facts, probably not a senior officer. The second criteria can be determined based on what the company’s governing documents (articles, bylaws, operating agreement, etc.) say. The third and fourth criteria are trickier. However, it seems like a good rule of thumb seems to be “if this person still has control of the company, but their title and the governing documents don’t say so, then they are still technically exercising substantial control over the company.”

Based on what I laid out above, here are what I think are some good next steps, especially for our readers who are business owners:

  1. Look at your org chart. Who are the people toward the top, and might they be senior officers?
  2. Look at your governing documents. Do any of those documents give any one individual authority to appoint/remove officers or directors?
  3. Think about how your business runs. Are there certain people that are in charge, even if the org chart and governing documents don’t tell that story?
  4. When in doubt, talk to your attorney. Your attorney will gladly help review your org chart, governing documents, and business practices to help you determine who exercises substantial control over the company.

Thank you for reading! Tune in next week for the next post in the series. – Sam