The 25% Ownership Test under the CTA: When Entities Own Equity
The Corporate Transparency Act (CTA) requires companies to disclose their beneficial owners to FinCEN, and the 25% ownership test is a key part of determining who qualifies. While it’s straightforward to calculate ownership for individuals, the process becomes more complex when entities, such as holding companies, trusts, or partnerships, own equity. In these cases, companies must evaluate indirect ownership to ensure compliance with the CTA’s reporting requirements.
When an entity owns equity in a company
When an entity owns equity in a company, the beneficial ownership test requires you to look through that entity to identify the individuals who ultimately control or benefit from it. For instance, if a holding company owns 40% of a reporting entity, and three individuals each hold equal shares in the holding company, their indirect ownership in the reporting entity would be calculated as 13.33% each. If any individual’s aggregated ownership across all entities involved meets or exceeds 25%, they must be reported on the BOI form.
Trusts and the 25% Ownership Test
Trusts also introduce additional complexity. The CTA requires identifying not just the trustee, but also any individual who has the right to revoke the trust, who benefits from the trust’s distributions, or who has decision-making authority over the trust’s assets. These individuals may indirectly own equity in a company through their relationship with the trust, making them subject to the 25% ownership test.
Why Accurate Ownership Reporting Matters
Failing to properly analyze entity ownership can lead to incomplete or inaccurate filings, exposing companies to penalties of up to $500 per day. To navigate this complexity, businesses should take a detailed look at their ownership structures and use tools designed to simplify the process. Counsel Club’s platform helps you untangle indirect ownership scenarios, ensuring accurate compliance with the CTA while saving time and avoiding costly mistakes.
