Mark A. Limardo, Partner

Under the Corporate Transparency Act (CTA), every “reporting company” must file a “beneficial ownership interest report” (a BOI report) by Jan. 1, 2025 (or, if formed during 2024, within 90 days of formation). In general, every domestic entity and every foreign entity registered to do business in the United States is a reporting company, unless the entity qualifies for exemption.

On its BOI report, a reporting company must provide identifying information about its “beneficial owners.” In general, a beneficial owner is an individual who either directly or indirectly owns or controls at least 25% of a reporting company’s equity (e.g., stock, membership interest, partnership interest, etc.), serves as “senior officer” of the reporting company, or has “substantial control” over the reporting company.

Except in limited circumstances, an entity cannot be reported as a beneficial owner. So, if a reporting company has an entity as an equity owner, in management (e.g., general partner or manager), or with “substantial control” (e.g., “major decision” rights), the reporting company must look through the entity and find each individual who either, through or on behalf of the entity, indirectly owns or controls at least 25% of the reporting company’s equity or exercises “substantial control” over the Reporting Company. See generally 31 U.S.C. Section 5336(a)(3); 31 CFR Section 1010.30(d).

Trustee Ownership in General. Under the CTA, a trustee is considered to own or control trust assets if the trustee has the power to sell or otherwise dispose of trust assets (which is typical under a standard trust document). Therefore, if 25% or more of a reporting company’s equity is held in a trust, the trustee must be reported as a “beneficial owner” on the reporting company’s BOI report, even though the trustee has no economic interest in the underlying trust assets. See 31 CFR Section 1010.30(d)(2)(ii)(C)(1).

Example 1. Family Trust owns all of the stock of ReportCo, a Delaware corporation, with individual X, a long-time family friend, as the sole trustee. X is a beneficial owner of ReportCo, because the CTA treats X in X’s capacity as trustee as the owner of the ReportCo stock.

Trustee Ownership Through an Entity Trustee.Combining the CTA’s general “look-through” rule with the CTA’s trustee ownership rule generates complex compliance obligations for an entity (corporate) trustee. If 25% or more of a reporting company’s equity is held in a trust with a corporate trustee, the reporting company must look through the corporate trustee to find each individual who must be reported as a beneficial owner through such individual’s relationship to the corporate trustee. See Beneficial Ownership Information—Frequently Asked Questions (www.fincen.gov/boi-faqs)(FAQs) D.16.

Example 2. Same facts as Example 1, except that TrustCo, a Delaware corporation that is itself a Reporting Company, is the sole trustee, X is TrustCo’s sole shareholder, and X provides no services to Family Trust (either directly or as a TrustCo employee). X is a beneficial owner of ReportCo, because X indirectly owns the ReportCo stock through X’s ownership of TrustCo (which is treated as owning the ReportCo stock).

Example 3. Same facts as Example 2, except that TrustCo has 10 equal shareholders (including X) and X is a TrustCo employee charged with performing TrustCo’s duties as the trustee of Family Trust. X is treated as the owner of the ReportCo stock held in Family Trust, because X controls the ReportCo Stock in X’s capacity as the TrustCo employee performing TrustCo’s duties as the trustee of Family Trust. Therefore, X remains a beneficial owner of TrustCo, even though X indirectly owns less than 25% of ReportCo’s stock through X’s ownership of TrustCo.

Example 4. Same facts as Example 3, except that X owns no TrustCo stock. The result is the same as in Example 3.

Limited Relief Certain for Entity Trustees. In the FAQs, the U.S. Department of Treasury (FinCEN) provides limited relief to the “look-through” rule for certain corporate trustee arrangements. If a corporate trustee arrangement meets three conditions (discussed below), the reporting company can report the corporate trustee as a beneficial owner in lieu of an individual who otherwise would been reported as beneficial owner only as a result of such individual’s status as an equity owner (e.g., a shareholder) of the corporate trustee.

To take advantage of this “no look-through” rule with respect to a particular individual, the entity trustee arrangement must meet the following three conditions: the corporate trustee is itself exempt from the CTA (e.g., “large operating company,” public company or bank); the individual is treated as a beneficial owner of a reporting company only because the individual is an equity owner (e.g., shareholder or partner) of the CTA-exempt corporate trustee; and the individual does not otherwise control the ownership interest in the reporting company or exercise “substantial control” over the reporting company. See FAQ D.16.

Example 5. Family Trust owns all of the stock of ReportCo, with TrustCo, a Delaware corporation, as the sole trustee. Under the “large operating company” exemption, TrustCo is itself CTA-exempt. Individual X is TrustCo’s sole shareholder but has no direct involvement with the administration of Family Trust or ReportCo. In lieu of X, reporting company may report TrustCo as a beneficial owner, because TrustCo is CTA-exempt and X’s status as a beneficial owner arises only as a result of X’s status as TrustCo’s sole shareholder (i.e., an indirect owner of the ReportCo stock through X’s ownership of TrustCo).

Example 6. Same facts as Example 5, except that TrustCo is not itself CTA-exempt. ReportCo cannot report TrustCo as a beneficial owner in lieu of X. Instead, X must be reported as a beneficial owner of ReportCo.

Example 7. Same facts as Example 5, except that X, in X’s separate capacity as a TrustCo employee, is charged with performing TrustCo’s duties as the trustee of Family Trust (including authorizing the sale of any ReportCo stock). ReportCo cannot report TrustCo as a beneficial owner in lieu of X. Instead, X must be reported as a beneficial owner, because X controls the ReportCo stock as a TrustCo employee acting in discharge of TrustCo’s duties to Family Trust.

Example 8. Same facts as Example 7, except that Y, not X, is TrustCo’s sole shareholder with no direct involvement with the administration of Family Trust or ReportCo. For X, the result is the same as in Example 7. For Y, the result is the same as the result in Example 5. So, as result of the Family Trust’s ownership, ReportCo garners two beneficial owners: X and TrustCo (in lieu of Y).

So Now What? Given tight filing deadlines and the added complexity of trustee ownership under the CTA, any reporting company that is either 25% or more owned by or subject to the “substantial control” of a trust, together with the trustee of the trust, should start sooner rather than later on its CTA compliance. To get the ball rolling, a reporting company with trustee ownership or control should consider the following threshold issues:

• How sophisticated are any potential beneficial owners? A family friend who volunteered to act as a trustee for a family trust may be dismayed to learn about his or her new disclosure obligations under the CTA. Even after educating a trustee about the trustee’s potential beneficial owner status, be prepared for some pushback and even resignation.
• How complex is the ownership and management structure? The more complicated a reporting company’s ownership and management structure, the more difficult CTA compliance will be. A reporting company that is a small family-owned business will probably have ready access to sufficient information to file its BOI report. In contrast, a reporting company with multiple individual and/or entity investors may have not have access to the necessary information about or even cooperation from these investors.
• What is a strategy for CTA compliance? Any CTA compliance strategy will vary, depending on the answers to the preceding questions. A small family-owned reporting company held in trust with a family friend as trustee may be able to harvest the necessary information for its BOI report after internally reviewing its entire ownership structure and sending a few hounding emails to its identified beneficial owners. In contrast, a reporting company with a tiered ownership structure may have to rely on representations from an entity investor or corporate trustee as to each individual who is a beneficial owner in the reporting company through the entity investor or corporate trustee. In a worst case scenario, a reporting company, its entity investors, and corporate trustees may disagree on the proper application of the CTA, particularly in light of the CTA’s novelty and lack of precedent.
• How can a reporting company protect against an audit? Regardless of strategy, every reporting company should properly and contemporaneously document its compliance efforts, in case it ever needs to defend a BOI report on audit. Contemporaneous documentation becomes even more important, if a beneficial owner disputes or simply refuses to comply with any CTA-related obligation
• How does a reporting company claim the special rule for corporate trustees? If owned or controlled by a trust with a corporate trustee, the reporting company at a minimum must report as a beneficial owner any trustee employee directly providing trustee services. If the reporting company wants to use the “no look-through” rule outlined above, the reporting company will need to confirm that the corporate trustee is itself CTA-exempt. Because a reporting company probably cannot access sufficient information about a corporate trustee or its employees, the reporting company may have to rely upon representations from the corporate trustee, both as to the identity of any trustee-associated beneficial owner and the applicability of the “no look-through” rule. In this case, the reporting company may want to seek indemnification protection from a corporate trustee if any representation proves to be incorrect.

Reprinted with permission from the September 9, 2024 edition of the New York Law Journal © 2024 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or [email protected].