What is meant by “substantial control”? Under the Corporate Transparency Act (CTA), the definition of substantial control is distinct from other federal statutes defining that term, such as securities laws. Under the CTA, an individual is deemed to exercise substantial control if any of the following are true:
- they serve as a senior officer or manager of the entity that must report beneficial ownership information to FinCEN,
- they have authority over senior officer appointments,
- they have authority over a majority of the board of directors, or
- they influence important decisions, including those related to business operations, asset transactions, equity issuance, borrowing money, entering into contracts, and governance documents.
In the CTA, there is a non-exhaustive list of examples wherein an individual may exercise substantial control, but the foregoing list should give you an idea as to how wide open and subject to interpretation the term “substantial control” is as it relates to business operations, asset transactions and equity issuance.
Some of you may have read my previous email thinking, “Well, Jeff, I’m going to make sure I never own more than 24% of an LLC or corporation, so I won’t have to be listed in any report.” OK, then how are you going to be able to have that entity do what you want it to do without having “substantial control”? For example, in a small LLC that buys, fixes, and resells houses, whoever makes the decisions on what houses to buy, how much to spend, how to do the rehab, what contractors to hire, where to borrow the money, and when to sell the property and for how much, would all have substantial control. I trust by now you are beginning to realize just how broad and invasive this legislation is.
I’m going to close by giving you an update to a presentation I did last month on the CTA on behalf of the Seller Finance Coalition. Between when I did that presentation and the end of 2023, the regulators at FinCEN changed and expanded the timeframe for a newly-formed 2024 company to report. They have 90 days. If a company formed in 2024 makes any changes to its ownership structure, such as adding or losing a member or someone different having substantial control, it is still a 30-day reporting window for that. In the emails I share next week, I hope to be able to share with you my experience of navigating the FinCEN website which should now be up and operational.
