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What is Substantial Control, and Why Does it Matter?
The Corporate Transparency Act (CTA) introduces the reporting of beneficial owners of majority U.S. and foreign entities to the Financial Crimes Enforcement Network (FinCEN). Traditionally, the term “beneficial owner” has been closely associated with individuals holding a financial interest in a company, as delineated under the Bank Secrecy Act. However, the CTA broadens this definition to encompass individuals with “substantial control” over a company. This part of the definition may call for professionals and their clients to have a second thought about who to report as beneficial owners on their entities’ Beneficial Ownership Information (BOI) reports. Below, we will seek to answer the question: what is substantial control?
Understanding “Substantial Control”
The CTA defines three primary avenues through which an individual can exert substantial control over a reporting company, directly or indirectly, thereby qualifying as a beneficial owner:
- Senior Officer Role: This category includes individuals serving in high-ranking positions such as President, CEO, COO, CFO, or those undertaking similar responsibilities. It’s crucial to recognize that the essence of substantial control reaches beyond formal titles, focusing instead on the functions and duties performed. Companies lacking positions with traditional corporate titles must evaluate the roles of their members to identify those fulfilling equivalent senior management responsibilities.
- Authority over Appointments: Individuals with the power to appoint or dismiss senior officers or board of directors embody another facet of substantial control. This authority signifies a significant influence over the company’s strategic direction and operational dynamics, making it a critical factor in the identification of beneficial owners.
- Decision-Making Power: The capacity to make or influence critical business decisions is a definitive marker of substantial control. FinCEN categorizes these critical decisions into three broad areas:
- Business Decisions: Including but not limited to the company’s strategic focus, venture creation or termination, and significant operational changes.
- Financial Decisions: Encompassing major asset transactions, investments, budget approvals, and financial structuring.
- Structural Decisions: Relating to corporate restructuring, mergers, and amendments to governance documents.
There is also a fourth category that FinCEN specifies in the final regulations that is not necessarily defined, as it is the ‘catch-all.’ Essentially, the last avenue is “any other form of substantial control over the reporting company.” FinCEN explains that control exercised in new and unique ways can still be substantial. For instance, within the realm of flexible corporate frameworks, there might be distinct signs of control that do not fit neatly into the previously mentioned categories. 
This broad category introduces the potential for diverse interpretations as legal experts and certified public accountants (CPAs) guide their clients. In such cases, some advisors might lean towards recommending the reporting of individuals even in situations where it’s unclear if they align precisely with any of FinCEN’s provided examples. An often-overlooked aspect of substantial control involves individuals holding a Power of Attorney (POA) that grants them the authority to make decisions on behalf of the company or its owners. Such individuals may not hold any formal title or position within the company but can exert control equivalent to that of a beneficial owner through their decision-making capabilities.
Implications for Reporting Companies
Determining individuals with ‘beneficial ownership’ under the CTA requires a comprehensive review of a company’s governance structure and decision-making processes. Business owners must perform a diligent assessment to identify individuals who, through their roles, authority, or decision-making power, exert substantial control over the company.
Are You Prepared to File?
To download our Substantial Control Organizer to aid in the collection of beneficial owner information from your clients, click here: Substantial Control Organizer.
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