top of page
  • Writer's picturechriserich

Understanding FinCEN's New Beneficial Ownership Reporting Requirement for Business Entities Under the Corporate Transparency Act

About the Author:

This being my first post for A. R. Pike Law Firm, I thought it appropriate to introduce myself and explain my role at A. R. Pike Law Firm, while passing along some relevant and useful information to our readers and clients. I’m Chris Erich, Senior Associate Attorney at A. R. Pike Law since February 2024. I graduated from Ave Maria School of Law, in Naples, Florida, in December 2016. In 2017, I became licensed to practice law in the State of Florida and began my legal career at a small personal injury and employment law firm in Florida. I soon realized that my skills and interests lay in business law and estate planning and opened my own solo firm in 2018. Having attended William and Mary back in the late 1990s, I fell in love with Virginia, and decided to relocate from Naples, Florida to Bedford, Virginia in 2022 and get my Virginia law license. I am very pleased to be working with Attorney Aaron R. Pike here in the Wyndhurst area of Lynchburg, at A. R. Pike Law Firm, practicing Business and Estate Planning law.


Introduction:

In the realm of business law, understanding the concept of beneficial ownership is essential for both business owners and legal practitioners, especially in light of the new Corporate Transparency Act (or “CTA”) which now requires virtually all businesses, new or pre-existing, to report beneficial ownership information by filing a (“BOIR”) or “Beneficial Owner Information Report” with FinCEN, or risk steep fines and penalties for non-compliance. For those of you who have never heard of FinCEN, it is the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury. The new laws under the CTA have a broad reach, requiring a BOIR from virtually every business entity that wasn’t already required to provide the same or substantially similar information under prior regulations.


Since this is a new concept for many business attorneys and their clients, this article is an attempt to explain and demystify the concept of “beneficial ownership,” why understanding this concept is so important, and how the new legislation applies to U.S. businesses, regardless of their state of formation. Additionally, I will discuss how we, at A. R. Pike Law Firm, are assisting our clients in complying with the beneficial ownership reporting requirements under the CTA.


 

Defining Beneficial Ownership:

Beneficial ownership refers to the right to enjoy the benefits of ownership of a property or asset, even though legal title or formal ownership might be held by another party. In the context of business entities, beneficial ownership sheds light on the individuals or entities that ultimately control or derive economic benefit from a company. Beneficial ownership goes beyond the legal ownership of a business entity as recorded in official documents. While legal ownership typically refers to the individual or entity whose name appears on the company's registration documents, beneficial ownership looks at the ultimate beneficiaries who reap the rewards of ownership, such as profits, dividends, or voting rights. These beneficial owners may exert influence or control over the entity's affairs, regardless of whether their names are publicly associated with the business.


Significance of Beneficial Ownership:

Understanding beneficial ownership is crucial for various reasons, including:


1. Transparency and Accountability:

Identifying the true beneficial owners enhances transparency within a business entity. It enables stakeholders, regulators, and the public to ascertain who ultimately controls or benefits from the company's operations, fostering accountability and trust.


2. Compliance and Regulation:

Regulatory bodies often require businesses to disclose their beneficial owners to prevent illicit activities such as money laundering, corruption, or terrorist financing. Compliance with such regulations is vital for avoiding legal repercussions and maintaining the company's reputation. The new BOIR requirement is but one such example of how the federal government gathers and uses such information.


3. Risk Management:

Knowing the beneficial owners helps businesses assess potential risks associated with their stakeholders. It allows them to evaluate the integrity, financial stability, and potential conflicts of interest of those who hold significant control or influence over the entity.


4. Corporate Governance:

Beneficial ownership disclosure promotes good corporate governance practices by ensuring that decision-making powers are vested in responsible and accountable individuals or entities. It facilitates effective oversight and management of the company's affairs, safeguarding the interests of shareholders and stakeholders.


Determining Beneficial Ownership:

Identifying beneficial ownership can be complex, especially in cases involving intricate ownership structures or nominee arrangements. Several factors may influence beneficial ownership, including:


1. Direct Ownership:

Beneficial ownership may stem from direct ownership of shares or equity interests in the company. In such cases, the individuals or entities holding the shares are considered the beneficial owners.


2. Indirect Ownership:

Indirect ownership occurs when shares or interests are held through intermediary entities, such as trusts, partnerships, or corporate vehicles. In these instances, tracing beneficial ownership requires scrutinizing the ownership chain to identify the ultimate beneficiaries.


3. Nominee Arrangements:

Nominee arrangements involve holding legal title to assets on behalf of another party, often to maintain anonymity or facilitate complex transactions. While the nominee appears as the legal owner, the true beneficial owner retains control and entitlement to the assets.


4. Control and Influence:

Beyond legal ownership, beneficial ownership may be inferred from the degree of control or influence exerted by certain individuals or entities over the company's operations, finances, or decision-making processes.


Implications of Beneficial Ownership:

The concept of beneficial ownership has significant implications for various stakeholders, including:


1. Shareholders and Investors:

Understanding who truly owns and controls a company is vital for investors assessing investment opportunities and mitigating risks associated with undisclosed ownership structures or conflicts of interest.


2. Regulators and Law Enforcement:

Regulatory authorities rely on beneficial ownership disclosures to enforce compliance with anti-money laundering, anti-corruption, and counter-terrorism financing regulations. Access to accurate beneficial ownership information strengthens their ability to combat financial crimes and illicit activities.


3. Business Owners and Directors:

For business owners and directors, transparent disclosure of beneficial ownership enhances corporate governance, risk management, and stakeholder relations. It fosters trust and confidence among investors, customers, and business partners, ultimately contributing to the company's long-term success.


Conclusion:

In conclusion, while beneficial ownership has always been a fundamental concept in business law, the CTA’s BOIR mandate now imposes significant new requirements on small business owners, with substantial penalties for non-compliance. We have shown how beneficial ownership goes beyond formal ownership arrangements to identify the ultimate beneficiaries of a company's assets and profits. Recognizing and disclosing beneficial ownership is crucial for promoting transparency, accountability, and integrity within business entities, as well as to ensure compliance with the new BOIR requirement under the CTA.


At A. R. Pike Law Firm, our attorneys share a firm understanding of beneficial ownership and the CTA requirements and are happy to assist our business clients in navigating these new regulatory requirements and laying a solid foundation for sustainable growth and success. This allows our business clients to focus on what they do best: fostering brand identity and awareness, providing valuable goods and services, and growing their brand. Have a topic you’d like to see discussed? Leave us a comment. Have questions about how to structure your business or comply with the law? Schedule a consultation. We can help!

14 views0 comments

Comentarios


bottom of page