What Is a Beneficial Owner: Definition, Reporting, and Compliance

If you’re a business owner, legal professional, or entrepreneur, you might be wondering what beneficial ownership means and how to comply with the reporting requirements of the Corporate Transparency Act. What is a beneficial owner of a business? And what’s a beneficial owner report? It can seem overwhelming, but with the right knowledge and a little help, you can report beneficial ownership information and keep your business on the right side of the law.

What is beneficial ownership?

Beneficial ownership is a concept in corporate law that determines who controls and benefits from a business. You need to identify beneficial owners in your business so that you can comply with federal regulations and be transparent with stakeholders and financial institutions.

What beneficial ownership means

At its core, beneficial ownership is about understanding who really holds the power and financial interest in a business. It refers to the individual or entity that ultimately benefits from the business, even if the business is in someone else’s name. This beneficial owner definition might sound straightforward, but the reality is often more complex, especially in businesses with layered ownership structures or those held in trusts.

For example, suppose a business is held in a trust. In that case, the trustee might hold legal ownership, but the beneficiaries are the beneficial owners because they enjoy the benefits of the assets within the trust. In a corporation, shareholders are often the beneficial owners, but their level of control and how much they actually benefit depends on the size of their shareholding and any other agreements in place.

The role of beneficial owners in business

Beneficial owners are often the driving force behind a company’s major decisions and strategic direction. They can be involved in all aspects of the business, from financial management to day-to-day operations. Some beneficial owners may be less hands-on than others, but the point is that they could exercise their power if they wanted to.

Imagine you own a business with a few partners. While you all share legal ownership, one partner might have more influence because they own a larger share or have more control over decisions. Because their role is so critical to the business’ success, this partner is the ultimate beneficial owner.

Identifying beneficial owners in your business can help you manage your affairs more effectively and make better decisions that benefit everyone. It’s also required for beneficial owner reporting under the Corporate Transparency Act. If you haven’t yet identified your beneficial owners, now is the time to start.

Legal vs. beneficial ownership

One of the most important distinctions in business ownership is the difference between legal and beneficial owners. Legal ownership refers to the person or entity whose name appears on the title or official records of the business. Legal owners have the right to transfer or sell the business and are often considered the “official” owners in the eyes of the law.

Beneficial ownership applies to anyone who enjoys the financial benefits and has the power to influence decisions related to the business. This owner may not have their name on the title, but they still hold a lot of power. Oftentimes, the beneficial owners of a business are the same as the legal owners, especially in smaller companies. But they don’t have to be.

For example, say a corporation owns an apartment building. The legal owner is the corporation itself, because it holds the title. However, the beneficial owners are the shareholders of the corporation, as they ultimately benefit from the profits the property makes through dividends and increased share value.

Beneficial ownership and the Corporate Transparency Act

Thanks to the recently passed Corporate Transparency Act (CTA), many business owners who were unaware of the term now find themselves asking, “What is a beneficial owner report?” This federal law, part of the Anti-Money Laundering Act of 2020, aims to increase transparency in the business world by making it harder for illicit actors to hide behind anonymous entities. It’s a major change to how beneficial ownership is reported and regulated in the United States.

Overview of the Corporate Transparency Act

The CTA addresses what some viewed as a gap in U.S. regulations: the lack of transparency around who truly owns and controls companies. Under the CTA, certain entities are required to disclose beneficial owner information to FinCEN (the Financial Crimes Enforcement Network), which stores it in a confidential database.

The goal of the CTA is to prevent individuals from using reporting companies as a front for illegal activities like tax fraud, money laundering, and terror financing. It will also bring the U.S. in line with international standards on corporate transparency, which many other countries have already adopted.

Reporting requirements under the act

If your business falls under the scope of the Corporate Transparency Act, you must report ownership information to FinCEN. Unless one of 23 exemptions applies, the businesses required to report include corporations, LLCs, and other legal entities created by filing with the state, known as domestic reporting companies. Foreign reporting companies include those formed in another country but registered to do business in the U.S.

Some entities, such as publicly traded companies and financial institutions like banks and credit unions, are exempt because they already have to file detailed information with the government. There’s also an exemption for “large operating companies,” which is a business that employs more than 20 full-time employees in the United States, an operating presence at a physical office in the U.S., and more than $5 million in gross receipts or sales—even if they’re privately held.

A reporting company created in 2024 must file its initial report by Jan. 1, 2025. A reporting company created at any point in 2024 has 90 days after registration to file. If a reporting company is created on or after Jan. 1, 2025, then it must file its report within 30 days of registration. 

Penalties for non-compliance

If you don’t file your Beneficial Ownership Information Report on time, provide false information, or don’t update your report with the Financial Crimes Enforcement Network when your ownership changes, you could face penalties. Civil penalties include fines of up to $500 per day of non-compliance, which can add up quickly. If you provide false information intentionally—or a beneficial owner provides you with false information—criminal penalties can include fines of up to $10,000 and imprisonment for up to two years.

You can see why it’s important to understand and comply with the CTA’s requirements. Plus, it’s not just about avoiding fines—non-compliance can also damage your business’ reputation and relationships with regulators and financial institutions.

Who is a beneficial owner?

The CTA intentionally made the definition of a beneficial owner broad so it would apply to many different individuals and legal entities. In general, a beneficial owner is anyone who owns 25% or more of a reporting company’s equity or exercises substantial control over the company. FinCEN has provided guidance and examples to help identify beneficial owners, which we’ll go over next.

Key characteristics of a beneficial owner

According to FinCEN, a beneficial owner is someone who:

• Owns 25% or more of a company’s equity. This includes both direct control ownership interests (where the individual directly holds shares or ownership interest) and indirect ownership (where ownership is held through another legal entity).
• Exercises substantial control over the company. This could be through voting rights, decision-making authority, or other means of influencing the company’s operations and strategic direction.
• Has the power to influence significant decisions. Senior officers and C-suite executives are almost always considered beneficial owners, even if they don’t own any of the reporting company’s ownership interests. So is anyone with the authority to hire and fire these people.

Beneficial ownership in different business structures

Equity and decision-making power are distributed differently in each type of legal entity, so beneficial ownership can vary depending on the business structure.

Limited liability companies (LLCs): LLCs have flexible ownership and management structures, so identifying the company’s beneficial ownership information can be tricky. The beneficial owner report for an LLC might list members or managers who hold significant equity or decision-making power. Legal and beneficial owners are also often the same in this business structure.

• Limited partnerships: In a limited partnership, beneficial ownership might extend to partners who share in the profits and losses of the business. Depending on the partnership agreement, certain partners may have more control or a larger share of the profits, making them the beneficial owners.
• Corporations: In a corporation, the beneficial owners are usually shareholders who meet the criteria outlined in the Corporate Transparency Act. If a shareholder owns 25% or more of the company’s stock, they’re a beneficial owner. Control can also be a factor—if a shareholder or group of shareholders exercises substantial control or has significant voting power, they may also qualify as beneficial owners.
• Trusts: If a business is held in a trust, the beneficiaries of the trust are usually considered beneficial owners. While the trustee holds legal ownership, the beneficiaries enjoy the income generated by the trust.

Typically, general partnerships and sole proprietorships don’t have to file a Beneficial Ownership Information Report. That’s because they are usually not required to register with their state office, so they’re exempt from the CTA.

Company applicant vs. beneficial owner

If your business is created on or after Jan. 1, 2024, then you will need to identify your company applicants on your initial beneficial owner report, as well as your beneficial owners. These terms refer to different roles within a business (and they’re both different from the legal owners). While the company applicant is the person who files or directs the filing of the formation document to create the business entity, the beneficial owner is the person that the reporting company reports to FinCEN for transparency purposes.

A company applicant is the individual who files the required forms and documents with the state to establish the legal entity, such as an LLC or corporation. The company applicant could be the business owner, a lawyer, an accountant, or another representative acting on behalf of the business.

A beneficial owner, on the other hand, may not be involved in the formation process but ultimately controls or benefits from the company. For example, you might hire a lawyer to file the paperwork for your new LLC. In this case, the lawyer is the company applicant, but you, as the business owner, are the beneficial owner because you’ll benefit from the company’s operations and have control over its direction.

How to report beneficial ownership information

To report beneficial ownership information, you’ll need to gather detailed information about the company and each beneficial owner and submit it to FinCEN. To do that, you’ll need to understand the forms, procedures, and deadlines involved so you can stay compliant and navigate the process smoothly.

Required information for reporting

Beneficial ownership information reporting needs to provide detailed information so regulators can identify and verify each individual’s ownership or control. 

Company information 

• Legal name: Provide the legal name of the company as it is registered in the state filing office.
• Trade name, if any: Provide any trade name (DBA) used by the company.
• Address: The current street address of its principal place of business. If the principal place of business is not in the U.S., then the company must report the address it uses to conduct business in the U.S. 
• Taxpayer identification number: The taxpayer identification number used by the company, such as the EIN, SSN, or TIN. 

Beneficial owner information

Reporting companies must provide the following information for each beneficial owner. 

• Full legal name: Provide the complete name of the beneficial owner, as it appears on their official identification documents, so they can be accurately identified in the FinCEN database.
• Date of birth: The exact date of birth of the beneficial owner is required to differentiate between individuals with similar names and to confirm their identity.
• Address: Provide the residential street address. Make sure you get a current address from each beneficial owner to avoid compliance issues.
• Identifying document: Provide the unique identifying number from an acceptable identification document and the state or jurisdiction that issued the identification document. This is usually a passport or driver’s license. An image of the identification document must be provided. Each beneficial owner can also apply for a FinCEN identifier. This is a unique identifier that helps verify the identity of the beneficial owner and ensures that the information is accurate.

Company applicant information, if applicable

A reporting company created on or after Jan. 1, 2024, must provide the following information about the company applicant(s):

• Contact information: Provide the company applicant’s legal name, date of birth and complete current address. The address provided must be the individual’s residential street address, except for company applicants who form or register a company in the course of their business, such as a paralegal. In those cases, the applicant may use a business street address. 
• Identifying document: Provide the unique identifying number from an acceptable identification document and the state or jurisdiction that issued the identification document. This is usually a passport or driver’s license. An image of the identification document must be provided. 

A company applicant may provide a FinCEN identifier in lieu of this information.

Filing the Beneficial Ownership Information Report

You can file a Beneficial Ownership Information Report online through FinCEN’s reporting portal. The online portal allows for an option to complete and upload a PDF report or an online form.  

• Set up an account: To report beneficial owner information online, you need to create an account on the FinCEN portal. This involves providing basic information about your business and setting up login credentials. Once your account is created, you can access the reporting forms and instructions.
• Enter the beneficial ownership information: After setting up your account, you’ll enter the details of the company and each beneficial owner, including their full legal name, date of birth, address, and unique identifier.
• Submit the report: Once you’ve entered all the necessary information, double-check to make sure everything is correct, then hit “Submit.” Keep a copy of the completed report for your records.
• Keep your confirmation: You’ll also receive a confirmation from FinCEN. Save this confirmation along with the copy of your report in your records in case there are any questions or issues in the future.

Updating beneficial ownership information

The goal of any business is to grow. As your business evolves, you’ll probably see some changes in beneficial ownership—or you might become a large operating company that is now exempt from reporting your company’s beneficial ownership information. When the following changes happen, federal law requires businesses to update their beneficial owner form within 30 days.

• New beneficial owners: If a new individual or entity acquires a significant ownership stake in your business (25% or more), you need to update your report to include their information.
• Changes in the reporting company’s ownership interests: If your company’s ownership interests change so that someone is now a beneficial owner, you must update your report to reflect this change.
• Changes in control: If the control of the company shifts to a different individual or entity, you need to report it. This could happen if a new partner joins the business or if an existing owner takes on a more influential role.
• Changes in address or identifying information: If a beneficial owner changes their address or if there’s a change in their identifying information (e.g., they get a new passport), you need to update your report to reflect the new information.

Becoming an exempt company: If your reporting company becomes exempt, you’ll need to file an updated report where you check a box that states you’re a newly exempt company.

To update your beneficial owner form, you can log into your FinCEN account, make the necessary changes, and resubmit the report. Updates must be submitted to FinCEN within 30 calendar days after the change occurs. If a reporting company learns that information previously reported to FinCEN was inaccurate when filed, then it must file a corrected report no later than 30 calendar days after the reporting company becomes aware or has reason to know of an inaccuracy. 

Compliance and best practices

Maintaining compliance with beneficial ownership information reporting requirements is an ongoing process. Best practices can help reporting companies file reports accurately and on time to avoid penalties and stay in good standing with financial institutions.

Record-keeping for beneficial ownership

Accurate record-keeping is one of the most important parts of compliance for reporting companies. Here are some tips.

• Save the details: Keep detailed records of all beneficial owners, including copies of their identification documents and any correspondence related to beneficial ownership. You may need them to verify the information in your report or prove that you didn’t knowingly provide false information.
• Stay organized: Keep your records organized somewhere you can easily access beneficial ownership information. However, also make sure the records are secure, as they contain sensitive information. If you’re using digital records, consider encrypting the files or using secure cloud storage.

Track ownership changes: Regularly review your ownership structure and track any changes in ownership percentages, control, or identifying information. This will help you stay on top of reporting requirements and be confident that your records are always up to date.

Tools and resources for compliance

Reporting companies have various tools and resources available to them that can simplify the beneficial ownership information reporting process, automate updates, and provide reminders for upcoming deadlines.

• Compliance software: Compliance software helps you stay organized while you’re collecting and reporting company beneficial ownership information. It can provide automatic reminders, document storage to easily and securely access beneficial ownership information, error detection, and even data gathering tools like automated emails.
• Government resources: The FinCEN website offers a range of resources to help businesses understand their reporting obligations under federal law. You can find guidance documents, FAQs, and instructional videos that explain the requirements of the Corporate Transparency Act and how to file your report.
• Industry associations: Industry associations often have resources for businesses facing new regulatory requirements. They can provide expertise and guidance, best practices, and networking opportunities to help you stay informed about compliance issues.

Remember that while reporting ownership information to FinCEN is not an annual requirement, you do need to update your beneficial owner form if anything changes. As a reporting company, taking a proactive approach can streamline the process of gathering and reporting beneficial ownership information.

Engaging with legal and financial advisers

Legal and financial advisers can help you navigate complex ownership structures, interpret legal requirements, and prepare accurate reports. Many legal and accounting firms offer services specifically designed to help businesses comply with beneficial ownership reporting requirements.

Financial advisers can help you manage the financial aspects of your ownership structure, identify beneficial owners, and plan for future ownership changes. You could also turn to compliance consultants who specialize in helping businesses meet regulatory requirements. They can conduct compliance audits, offer advice, and provide ongoing support.

It’s also smart for any reporting company to work with a legal adviser to make sure they fully understand the implications of the Corporate Transparency Act for their business. A legal service can also draft, review, and file your beneficial owner information report. That can be a big relief for small business owners who already have enough on their to-do list. Check out LegalZoom’s services for beneficial owner reporting and more, so you can file with confidence.

FAQs

What is the meaning of beneficial owner?

The term “beneficial owner” refers to each person who truly benefits from ownership of a business, even if they’re not legal owners. This could be through dividends, profits, or control over the business’ strategic direction.

Beneficial ownership gives someone the power to influence decisions, control the company’s operations, and enjoy financial benefits when the company makes a profit. In a practical sense, the beneficial owner is the person who “calls the shots” in the business and reaps the rewards of its success.

Who is considered a beneficial owner?

According to the Financial Crimes Enforcement Network (FinCEN), a beneficial owner is someone who owns 25% or more of a company’s equity or exercises substantial control over the company’s operations. This can include direct ownership or indirect control through other legal entities.

For example, if an individual owns 25% of the shares in a corporation, they need to report ownership information to FinCEN. If a person doesn’t own a large percentage of the company but has the power to make significant decisions, like appointing or removing directors, they’re also a beneficial owner. Senior officers, like general counsel, a president, or anyone in the C-suite, are usually considered beneficial owners because they play a key role in decision-making.

Who is a beneficial owner of an LLC?

In an LLC, a beneficial owner is usually a member or manager who holds the company's ownership interests or has control over its decisions. For instance, if one member only owns 20% of the LLC but has the authority to make key decisions, they would be considered a beneficial owner. On the other hand, if one of the legal owners holds the same percentage but isn’t involved in the company at all, they may not be a beneficial owner. 

LLCs are a flexible business structure, which is one of their benefits as a legal entity. However, this can make it hard to determine who is a beneficial owner. If you’re not sure, it’s always best to get professional advice.

What is the IRS definition of beneficial owner?

The Internal Revenue Service (IRS) defines a beneficial owner as the person who is required under U.S. tax law to report the income or asset on a tax return. For example, if an individual is the beneficiary of a trust that holds income-generating assets, the IRS would consider them the beneficial owner of that income.  

The IRS definition is used for individual tax filing purposes. The definition of a beneficial owner under the Corporate Transparency Act is different and is set by the Financial Crimes Enforcement Network (FinCEN).