Types of Entities

By Laurence Donahue | December 28, 2023 |
Types of Entities

There are two categories of entities we care about, when considering Beneficial Ownership Information (BOI) reporting to FinCEN.

The first category pertains to the “reporting company,” the term used by FinCEN to identify companies who are required to report their BOI, and how the type of entity of a reporting company influences how one determines who the Beneficial Owners are of the reporting company.

The second category pertains to the types of entities who own a reporting company.

This blog article will discuss both categories, and how they impact Beneficial Ownership Information.

Types of Entities for Reporting Companies

As far as FinCEN is concerned, there are four (4) types of entities for reporting companies:

  • US-based Corporations,
  • US-based Limited Liability Companies (or LLC’s),
  • Any other US-based company “created by the filing of a document with a secretary or state or any similar office under the law of a State or Indian tribe”, and
  • Any foreign-based company “registered to do business in any U.S. State or Tribal jurisdiction by filing a document with a secretary of state or similar office of the State or Tribe.”

All such entities may be a “reporting company,” if they don’t meet the exemptions as identified in Section 1.2, starting on Page 4, of FinCEN’s Small Entity Compliance Guide, December 2023 – Version 1.1.

The entity type of the reporting company also influences how voting and control is determined, to identify which individuals exceed the 25% threshold.  See Page 23 of the Small Entity Compliance Guide.  Specifically, for Corporations, one looks at individual ownership interest as a percentage of the total shares of stock issued.  If the Corporation has classes of ownership, then things get even more complicated:  You need to compare the percentage of ownership interests versus the percentage of combined value.  See our blog article for more information about Classes of Ownership.

LLC’s can be treated the same as Corporations, if they are taxed under Subchapter C or Subchapter S (See our blog article on tax status, for more information about this).  However, LLC’s are to be treated differently, if they are taxed as a Partnership.  Specifically, FinCEN says you are to total up an individual’s capital and profit interests, as against the total outstanding capital and profit interests.

Therefore, the type of entity and its tax status, will influence how control and ownership interest are calculated for BOI reporting purposes.  It’s important you understand these issues, before trying to determine who are the Beneficial Owners that must report to FinCEN.

Type of Entities that Own Reporting Companies

From the perspective of entity types owning a reporting company, FinCEN has four (4) completely different types of entities to consider:

  • Individuals
  • Companies
  • Trusts
  • Other Entity Types

All such entities can directly own a reporting company, and indeed are said to have a “direct ownership interest” in a reporting company.  This is the easy part.

It becomes harder to identify Beneficial Owners, when you consider that FinCEN requires Beneficial Owners to be individuals only.  Therefore, companies, trusts and “other entities” are not capable of being Beneficial Owners, and because of that, FinCEN introduces a concept called “indirect ownership.”  Indirect ownership indicate a the level of ownership or control maintained by an individual, due to his or her relationship to a company, trust or “other entity” that has a direct (or indirect) ownership interest in a reporting company.

For example, if John Doe owns 50% of a reporting company, and the Doe Family Trust owns the other 50% of a reporting company, the question becomes, what individuals have power over the trust, such that they are considered to have indirect control over the reporting company through the direct ownership of the Trust?  Such individuals would be said to have a 50% indirect ownership interest in the reporting entity.

The same analysis applies for other types of entities.

Companies, however, are afforded a slightly different analysis.  Specifically, the owners of such companies are said to have a pro-rata indirect ownership interest in the reporting company, according to the direct (or indirect) ownership interest they have in the company.  For example, if John Doe owned 50% of the reporting company, and a John Doe Enterprises, LLC, owned the other 50% of the reporting company, the question is, who owns John Doe Enterprises, LLC?  If John Doe owns 50% of John Doe Enterprises, LLC, then John Doe is said to have a 25% indirect ownership interest in the reporting company (i.e. 50% of John Doe Enterprises times 50% it owns in the reporting company, equals 25%).

This analysis becomes even more difficult, when you consider nested companies.  You need to look at the top-most company, and follow-through the ownership chain down to the ultimate reporting company, to properly identify the correct direct and indirect ownership amounts in the reporting company.  Only then, can you properly calculate the individual ownership interests to determine who crosses the 25% threshold.

Still Have Questions?

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Posted in Entities

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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