What Is a Beneficial Owner?

What is beneficial ownership?

Beneficial ownership is a concept that determines who controls and benefits from a business. Identifying beneficial owners in your business helps you to 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. 

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?” As part of the Anti-Money Laundering Act of 2020, this act aims to increase transparency in the business world by making it harder for illicit actors to hide behind anonymous entities. 

Overview of the Corporate Transparency Act

Under the CTA, certain entities 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. 

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.

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.

How to report beneficial ownership information

To report beneficial ownership information, 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 and procedures involved.

Information needed for reporting

Beneficial ownership information reporting provides 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 provide the following information for each beneficial owner. 

• Full legal name: The complete name of the beneficial owner as it appears on their official identification document.
• Date of birth: The exact date of birth of the beneficial owner helps 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.
• 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.

Filing the Beneficial Ownership Information Report

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.  

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. 

It’s also smart for any reporting company to work with a legal adviser to make sure they fully understand the the Corporate Transparency Act. 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.