Part 5

Who is a Beneficial Owner Based On Ownership Interests?

In spite of the name “Beneficial Owner,” the term is far broader than simply including direct and indirect owners, and may include directors, officers, employees, creditors, and others, and individuals There is no limit on the number of people who could be considered Beneficial Owners, no matter how small the company. For many companies, determining Beneficial Ownership will be a simple reference to their ownership table and organization chart. For others, unfortunately, it will be a time consuming, tedious and expensive process.

A Beneficial Owner is:

  • Any individual who directly or indirectly owns or controls at least 25% of the ownership interests in the company, or
  • Any individual who has substantial control over the company.

Below we break down how to determine who is a Beneficial Owner based on ownership interests. 

Direct or Indirect Ownership  or Control of at least 25% of the Ownership Interests:

In order to determine who owns or controls at least 25% of the ownership interests, (1) identify all ownership interests, (2) determine who owns or controls the ownership interest, and (3) calculate the 25% threshold.

  • What is an “ownership interest”?

The definition of an ownership interest is lengthy and quite broad. It includes the following common types of ownership and catch all language from the definition:

  • Stock
  • Units and other LLC interests (including profits-only-interests)
  • Convertible instruments such as convertible notes, and SAFEs,
  • Put, call, straddle or other options for buying and selling ownership
  • “any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership”

You can find out more information about ownership interests here:

  • Who owns or controls the ownership interest?

An individual can directly or indirectly own or control an ownership interest through “any contract, arrangement, understanding, relationship, or otherwise.”  Below are a few common examples, although the law is broad enough to include other possibilities:

  • Joint Owners: Anyone who jointly owns an undivided interest. For example, a wife and husband as joint tenants with rights of survivorship (JTWROS).
  • Certain Trustees, Trust Beneficiaries, and Grantors or Settlors: Any of the following could be a Beneficial Owner:
    • A trustee or other individual who has the authority to dispose of trust assets.
    • A beneficiary who is the sole permissible recipient of income and principal from the trust.
    • A beneficiary who has the right to demand a distribution of or withdraw substantially all of the trust assets.
    • A grantor or settlor who has the right to revoke the trust or withdraw the trust assets.
    • Individuals who own or control entities that own the company: If the ownership interests are held or controlled by entities, then a form of this analysis needs to be done on those entities (and perhaps through multiple levels of ownership and control) to determine which individuals “own or control” the ownership interests in the reporting company. Pages numbered 24-28 (starting on the 31st page of the PDF) in section 2.3 of the Small Entity Compliance Guide contain good illustrations of this concept.
  • How is the 25% threshold calculated?

The calculations should be made as of the time the report is filed, and should assume that all outstanding options and similar interests (think of convertible notes, SAFEs, etc.) are treated as exercised. The calculation then depends on how the company is taxed, and whether the calculations can be made with reasonable certainty as described below.

  • Company Taxed as a Partnership: For companies that issue capital or profits interests, the individual’s capital and profit interests calculated as a percentage of the total outstanding capital and profit interests of the company.
  • Company Taxed as a Corporation: For companies taxed as corporations or that issue stock, the individual’s percentage is the greater of:
  • Voting Percentage: The total combined voting power of all classes of ownership of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote; or
  • Profits Percentage: The total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interests.
  • Backup calculation method: If the calculations above cannot be made with reasonable certainty, then the calculation will be based on ownership of any class or type of ownership interest owned by the individual.
  • Special Rule Relating to Owners that Are Exempt Entities. If an individual is a Beneficial Owner of the company exclusively because of the individual’s ownership interest in one or more exempt entities (for example, if the individual owns a large operating company which is exempt, which then owns a small subsidiary that is not exempt), the report may include the names of the exempt entity(ies) instead of the individual’s information.


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