Primer / What is beneficial ownership?

What is beneficial ownership?

The concept of beneficial ownership helps us understand how companies and other legal entities are owned and controlled.

Companies or people can own other companies…

The idea that people own companies and sometimes companies own companies is well understood.

Person A owns 100% of Company 1

…but it’s people that ultimately benefit…

Even when companies own companies, individuals almost always appear at the end of the ownership chain. They ultimately benefit from companies’ financial successes, and often share in their failures.

Company 2 owns 100% of Company 3's shares. And Person B owns 30% of Company 2's shares

Here, Company 2 acts as an intermediary in a chain of ownership.

…so, we need to know who ultimately controls a company…

If a person owns something, they usually have some control over it. Owning shares in a company may confer voting rights, for example. But ownership and control are sometimes separated - by share classes, contracts, agreements and other mechanisms. For example, an executive director might have the right to appoint 60% of the other board members, while having little financial stake in the business.

Person B owns 30% of Company 2's shares. And Person C (an executive director) has the right to appoint 60% of Company 2's board members

Significant control over a company’s composition and decisions may be used to steer benefits and direct risks. Those people taking the financial risks for a company may not be the ones making the decisions. In which case, we need to know who is in control.

…to see the big picture.

Beneficial ownership therefore takes in both types of involvement with a company: ownership and control.

Beneficial ownership is the right to some share of a legal entity’s income or assets (ownership) or the right to direct or influence the entity’s activities (control).