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Editorial 7 MIN READ

The beneficial owner taxonomy, as FinCEN actually wrote it

Who counts under 31 CFR 1010.380(d), who does not, and the three places founders routinely miss a name

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 5 sections
  1. The two prongs, in order
  2. Five exceptions, and only five
  3. Where reporters miss names
  4. Building the list, in order of work
  5. Sources

nder the Corporate Transparency Act's reporting rule, a beneficial owner is any individual who either owns or controls at least 25% of a reporting company, or who exercises substantial control over it. Both prongs are live at once, and most of the compliance errors sit on the control prong, not the ownership prong.

The rule is 31 CFR 1010.380(d). It is short enough to read in one sitting and strict enough that reading it once is worth doing before you list names on a BOI report.

The two prongs, in order

The ownership prong in 31 CFR 1010.380(d)(2) captures any individual who "owns or controls" at least 25% of the ownership interests of the reporting company. The definition of ownership interest is deliberately wide. It reaches equity, capital or profits interests, convertible instruments, options, warrants, puts and calls, and "any other instrument, contract, arrangement, understanding, or mechanism used to establish ownership." A SAFE is an ownership interest. A convertible note is an ownership interest. A vested option is an ownership interest. The rule counts the position on a fully converted, fully vested basis; you cannot duck out by pointing at the cap table's common-stock column.

Joint and indirect ownership both count. The regulation specifies that ownership held jointly with another person, or through a trust (as trustee, as a beneficiary with the right to demand distributions, or as a grantor with the right to revoke), is the individual's ownership. Founders who set up a revocable trust and then treat the trust as a separate owner are reading the rule backwards.

The control prong in 31 CFR 1010.380(d)(1) is where the harder judgment lives. FinCEN defines substantial control four ways. An individual has substantial control if they are a senior officer, or if they have authority to appoint or remove any senior officer or a majority of the board or similar body, or if they direct, determine, or have substantial influence over important decisions, or, as a catch-all, if they have "any other form of substantial control." The catch-all exists to defeat arrangements that meet the substance test while dodging the title test.

Senior officer is defined functionally, not by business card. The term includes the president, chief financial officer, general counsel, chief executive officer, chief operating officer, and "any other officer, regardless of official title, who performs a similar function." A "Head of Operations" who runs operations is a senior officer. A vice president of sales who does not sit in the executive suite may or may not be, depending on what they actually decide. A general counsel is a senior officer by name; a contract attorney with the same email signature is not.

"Important decisions" is also enumerated. Under 31 CFR 1010.380(d)(1)(i)(C), they include decisions about the nature and scope of the business, major expenditures and investments, entering or terminating significant contracts, the sale, lease, mortgage, or transfer of principal assets, reorganization or dissolution, major compensation arrangements, and amendments to governance documents. An individual with substantial influence over any of these is a beneficial owner, even if they own no equity and hold no titled office.

Five exceptions, and only five

FinCEN lists exactly five exceptions to the beneficial-owner definition in 31 CFR 1010.380(d)(3). A minor child is excepted, provided the reporting company reports a parent or legal guardian's information instead; the child's status converts to reportable at majority. A nominee, intermediary, custodian, or agent acting on behalf of another is excepted, though the principal they act for is then the beneficial owner. An employee is excepted if their substantial control or economic benefit is derived solely from their employment status, and only if they are not a senior officer. An individual whose only interest is a future interest through a right of inheritance is excepted; they become reportable when the inheritance vests. A creditor is excepted if their interest is solely through the right to payment of a predetermined sum, including interest or a fixed fee.

The creditor exception is narrower than it reads. A lender with a warrant attached has an ownership interest through the warrant. A convertible noteholder has an ownership interest through the conversion feature. The "solely" in the exception is load-bearing. Anything that could convert into equity or profits blows the exception.

The employee exception is also narrower than it reads. It does not shield a senior officer, and it does not shield an employee whose economic benefit flows from anything beyond salary and standard employee benefits. An employee who holds 25% of the profits interests is not sheltered by having a W-2.

Where reporters miss names

The three common misses sit at the intersections the rule was written to catch.

The first is the minority officer with real decision authority. A founder who owns 10% but signs the material contracts, hires and fires the executives, and sets the budget is a beneficial owner under the control prong even though they never cross 25%. Companies that build their BOI list from the cap table only are underreporting by design.

The second is the advisor with a board seat. Independent directors and board observers who can vote on or meaningfully shape important decisions fall inside the control prong. This is true whether they hold a nominal option grant or nothing at all. An investor representative who sits on the board for a fund that owns 3% of the company is a beneficial owner of the reporting company, because the individual has substantial influence over important decisions.

The third is the trust. Founders routinely transfer equity into a revocable grantor trust and then report the trust as the owner. The rule looks through. Under 31 CFR 1010.380(d)(2)(ii)(C), an individual is treated as owning ownership interests held by a trust if they are the trustee, if they are the grantor of a revocable trust, or if they are a beneficiary who is the sole permissible recipient of income and principal or who has the right to demand distributions. A spouse who holds equity in a revocable trust is the beneficial owner. The trust is not.

Family office structures layer on one more trap. An individual who controls an entity that owns a reporting company controls the reporting company for BOI purposes; the regulation walks up the chain. If a holding LLC owns the operating company and one person can bind the holding LLC, that person is a beneficial owner of the operating company even if the cap table never names them.

Building the list, in order of work

The practical workflow starts with the ownership prong because it is documentable. Pull the capitalization table, convert everything on a fully diluted basis, count SAFEs, notes, options, warrants, and any other contingent equity. Anyone crossing 25% on that basis is on the list.

Then run the control prong. List the senior officers by function, not by title. Start with the people who sign the big things, approve the big spends, and hire or fire the executive team. Add anyone with authority to appoint or remove a senior officer or a majority of the board. Add the board members. Add any individual with demonstrable substantial influence over the enumerated important decisions.

Then apply the five exceptions, one by one, and document the reasoning. A contemporaneous memo explaining why a given advisor is or is not a beneficial owner will be worth having if FinCEN ever asks, and it will be worth more if the advisor's role changes and the company has to update the report within the 30-day window set by 31 CFR 1010.380(a)(2).

The cost of getting this wrong is set by 31 U.S.C. § 5336(h). Willful failure to report or update beneficial-owner information carries civil penalties of up to $500 a day (adjusted for inflation; FinCEN's 2024 adjustment puts the cap at $591 per day) and criminal penalties of up to two years and a $10,000 fine. The rule is new enough in March 2024 that most of the enforcement signal is still prospective, but the text of the penalty section is not hedged.

A company that spent an hour reading 31 CFR 1010.380(d) and another hour applying it to its own facts has done the work. The failure mode is almost always the shortcut: treating the cap table as the whole answer, or treating a trust as opaque, or treating a title as controlling over function. The rule is written to defeat each of those shortcuts in turn, and it does.

Sources

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