Ultimate Beneficial Owners (UBOs) vs. Shareholders
UBOs and shareholders are not the same thing
One could easily be forgiven for thinking that shareholders and UBOs are the same thing in legal terms.
Certainly, both involve owning a stake in a company from which some benefit is taken.
There are, however, some significant differences. Let us take a closer look at both.
Ultimate Beneficial Owners (UBOs):
The term UBO refers to individuals who ultimately own or control a legal entity such as a company, trust, or partnership.
These individuals have significant influence or control over the entity, even if their ownership is not always directly evident.
UBOs are important in the context of financial regulations and anti-money laundering (AML) measures, because knowing the real owners behind a legal entity helps prevent illicit financial activities.
Shareholders:
Shareholders are individuals or entities who are registered as owning shares or equity in a company.
When someone buys shares in a company, they become a legal shareholder and have certain ownership rights, such as voting at shareholder meetings and receiving dividends. They may also, however, have certain legal responsibilities, such as declaring any dividends they earn for tax purposes.
Shareholders can be divided into various categories, including common shareholders and preference shareholders. They may hold different classes of shares with varying rights and privileges.
Difference:
The key difference lies in the scope and context of ownership.
Shareholders are recognized through their ownership of shares, which is a more formal and documented process.
However, this legal ownership may or may not represent ultimate control. UBOs, on the other hand, are the individuals who have significant and real control or influence in a legal entity, whether officially registered as such or not.
Usually, the UBOs of a business are also the shareholders, but it is important to note that this is not always the case, and they need not, in fact, be shareholders; indeed, it is often the case that UBOs do not have any written evidence of their stake or interest.
UBOs, therefore, might not always be evident through standard documentation and may require deeper investigation to identify.
This is an important distinction for tax authorities and, often, law enforcement agencies.
It should be noted, however, that not all UBOs who are not shareholders are law-breakers by any means
Some examples of situations where the shareholders and UBOs are not the same
Publicly Traded Company
Shareholders:
Shareholder A: An individual who owns 1,000 shares of a publicly traded company.
Shareholder B: An institutional investor with a 5% stake in the same company.
In this case, shareholders A and B are known through the company's shareholder records. They hold shares representing ownership but may not necessarily have significant control themselves over the company's decisions.
UBO:
UBO: The ultimate beneficial owner could be an individual, say, Person X, who controls Shareholder A or has significant influence over Shareholder B. Person X might not appear in the company's shareholder records, but they are the ultimate person with substantial control.
2. Private Company with Complex Ownership Structure
Shareholders:
Shareholder C: An investment firm that owns 30% of a private company.
Shareholder D: A group of angel investors collectively holding 45% of the company.
In this private company, Shareholders C and D are documented in the ownership structure with defined percentages.
UBO:
UBO: The ultimate beneficial owner could be a wealthy entrepreneur, Person Y, who has established a complex ownership structure using various entities to hold shares. Person Y may not directly appear in the company's records, but they exert substantial control over Shareholders C and D.
3: Family-Owned Business
Shareholders:
Shareholder E: The eldest son holding 40% of a family-owned business.
Shareholder F: The youngest daughter with a 30% stake in the same business.
In a family-owned business, Shareholders E and F are part of the family and are clearly identified through the company's records.
UBO:
UBO: The ultimate beneficial owner could be the family patriarch (father of the family), Person Z, who doesn't hold a significant share directly but controls major family decisions and has economic benefits from the business. Person Z is the UBO, while the formal shareholders are other family members.
As we have seen from these examples, the UBOs may not be directly listed in official ownership records but can still have ultimate control or substantial influence over the entities through various means.
Shareholders, on the other hand, are formally recognized entities or individuals who hold shares in a company, and their ownership is documented in official records.
There are various types of UBO, based on the ownership and control structure of the company. Here are some common kinds:
Individual Owners:
Individuals who directly own a significant portion of the company's shares or have ultimate control over the entity.
Corporate Entities:
Companies or other legal entities that hold a substantial stake in the target company, either directly or through subsidiaries.
Trust Beneficiaries:
Individuals who are beneficiaries of trusts that hold shares in the company. Trust structures are sometimes used to conceal the identity of the ultimate owners.
Investment Funds:
Funds, such as private equity funds or hedge funds, that may have ultimate control over a company through their investments.
Nominee Shareholders:
Individuals or entities holding shares on behalf of someone else. Nominee shareholders might appear in official records, but they do not represent the true UBO.
A typical case would be someone who is prohibited from owning shares in a certain company using a family member or trusted friend to
Family Members:
In family-owned businesses, the UBO might be a specific family member who controls decision-making and benefits economically from the company.
Advisory Boards or Consultants:
Individuals who, although not holding formal titles as shareholders, have substantial influence over the company's operations and strategic decisions.
Complex Holding Structures:
Elaborate ownership structures involving multiple layers of companies, trusts, and individuals, making it challenging to identify the ultimate owners.
This is often done through the use of what are known as ‘shell companies’, which are basically companies that do not trade in themselves but whose purpose is to simply own the shares of another company, which may also be a shell company.
In fact, an actual trading company might be owned by a line of 10 or more shell companies, often registered in different parts of the world.
This makes the true ownership of the actually trading company difficult to identify or trace by the authorities.
High-Level Executives:
Key executives or managers who, through their roles, have substantial control or influence over the company's affairs.
Government Officials:
In many countries, certain government officials or employees are legal prohibited from owning shares in private companies.Â
These might then be UBOs, through shell companies, personal connections, or other means.
It is important to note that the specific types of UBOs can vary based on legal and regulatory frameworks, industry practices, and the specific circumstances of each company.
Identifying UBOs is crucial for compliance with regulations related to anti-money laundering (AML), combating the financing of terrorism (CFT), and other financial transparency measures.
Thank you for your attention!