Substantial Control

“Reporting companies” are those companies that must report the Beneficial Ownership Information (BOI) of individuals who are Beneficial Owners.

Who are such individuals?  FinCEN says Beneficial Owners are defined in one of two ways:  whether the total of their direct and indirect ownership interest is 25% or more (which goes to evaluate Voting Power), as well as whether such individuals exert “substantial control” over the reporting company.

FinCEN spends quite a bit of time talking about Substantial Control, but fails to really define the edge cases.  Starting on Page 16, the Small Entity Compliance Guide, v1.1 December 2023, identifies 4 primary “control indicators” to help identify individuals who possess “substantial control” over a reporting entity.

Thus, the 4 primary control indicators are:

1. Senior Officers
2. Appointment or Removal Authority
3. Important Decision-Maker
4. Catch-All

Senior Officers

Senior Officers are specifically defined in the FinCEN Small Entity Compliance Guide as the President, Chief Financial Officer (or CFO), General Counsel (or GC), Chief Executive Officer (or CEO) and Chief Operating Officer (or COO).

There is a big “catch-all” here, however, where FinCEN says “or any other officer, regardless of official title, who performs a similar function as these officers.”  This certainly means, then, Managers of LLC’s or those who are Authorized Representatives performing such duties on behalf of such individuals.  It also means Director-level individuals, Partners, and Managers if such individuals perform similar functions.

Can such individuals qualify for the Employee (Exception #3) exception from reporting BOI?  The answer is no, because one of the three criteria required to be met to qualify for this exception specifically prohibits “senior officers” of the reporting company from being excepted.

Appointment or Removal Authority

This applies to any individual who has the ability (or authority) to remove a senior officer or a majority of the Board of Directors (in a Corporation), or in theory, the Manager of a LLC (although this is not specifically addressed by FinCEN).

Important Decision-Maker

This is where we expect a lot of questions and uncertainly to prevail.  Important decision-makers are considered individuals who maintain substantial control over a company, and include any individual “who directs, determines, or has substantial influence over important decisions made by the reporting company, including (but not limited to) decisions regarding the reporting company’s:”

1. Business, such as:
   • Nature, scope, and attributes of the business
   • The selection or termination of business lines or ventures, or geographic focus
   • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts
2. Finances, such as:
   • Sale, lease, mortgage, or other transfer of any principal assets
   • Major expenditures or investments, issuances or any equity, incurrence of any significant debt, or approval of the operating budget
   • Compensation schemes and incentive programs for senior officers
3. Structure, such as:
   • Reorganization, dissolution, or merger
   • Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.

Fortunately, for those individuals who are employees of the reporting company, the Employee (Exception #3) exception from reporting BOI, may apply provided such individuals (1) are an actual employee within the meaning of 26 CFR 54.4980H-1(a)(15), which in general states the employee s subject to the will and control of the employer in what and how to do work, and that the employer may discharge the individual from work, (2) substantial control over, or economic benefits from, the reporting company are derived solely from the employment status as an employee, and (3) are not senior officers of the reporting company.

The Catch-All

This is defined as “any other form of substantial control over the reporting company.  Control exercised in new and unique ways can still be substantial.  For example, flexible corporate structures may have different indicators of control than the indicators [mentioned above].”

Again, if such individuals are employees of the reporting company, and such individuals meet the requirements of the Employee (exception #3) exception, then they will not have to report their BOI.

In Summary

We see Substantial Control primarily applying to senior-level officers and individuals, who do not qualify for the Employee (exception #3) exception, being the primary individuals who have to report due to Substantial Control over the reporting company.

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