Ownership Structure: Why It’s Crucial to Know Who’s Really in Control

The business verification process is incomplete without analyzing the ownership structure. Sometimes, it is simple and requires basic checks. Other times? It is like a maze that confuses, conceals, and potentially covers up links to illicit dealings. Businesses that are involved in illegitimate activities deliberately make their ownership structure so complex to cause confusion for others. Consequently, most of the time, these intricate frameworks are the areas of risk where crimes and fraud happen.

Implementing Know Your Business procedures helps verify the legitimacy of potential partners. Regardless of the intricacy of the ownership structures, KYB practices safeguard your organization from fraud and ensure you are only partnering with verified and legitimate beneficial owners.

What is the Ownership Structure?

In simple terms, ownership structure is the way a company is organized. It tells you about the division of power within an organization. Understanding the ownership structure is crucial to every corporate entity as it tells them about who has the legal and financial controls, who benefits from the controls, and who is responsible for its overall operations.

Ownership structure may have multiple dimensions. However, in the context of KYB, it refers to the beneficial owners and the persons who exercise significant control within a business. Because of the concentrated ownership that these people have, it is crucial to identify them through UBO identification.

Common Ownership Frameworks

Here are the most common ways to structure a business:

Sole Proprietorship: This is a one-person business. It is not registered as an LLC, and no traditional registration process is required. For all business operations, the owner of a sole proprietorship is personally liable for debts, losses, or court orders.

Limited Liability Company: An LLC is a company structure that combines the personal asset protection of a corporation with the tax advantages and flexibility of a partnership. This is ideal both for business owners who are at risk of being sued by customers due to accumulating debts and for business owners with significant assets who want to protect them from creditors.

Partnership: A partnership is two or more individual entities that run and own a business. Creating a partnership doesn’t require legal paperwork; you just have to agree on some terms with the person you’re starting a business with.

Limited Partnerships: In this type of ownership structure, there are two types of business partners: general partners and limited partners. General partners manage the company, and limited partners invest money.

Profit and Non-Profit Companies: This type of business structure is formed for various purposes like charitable, religious, educational or other public service reasons. Since this type of corporation is for the public good, federal or state governments don’t charge tax from them.

Why is Clear Ownership Important?

The legitimacy of a business is the crucial element to its operational efficiency. Accountability on the corporate framework is essential as it helps businesses verify the complex network of people behind them. No matter how promising the partner is, onboarding without thorough KYB verification can lead to severe consequences. The complexity of verifying a business depends on its ownership structure.

• Some ownership structures share similar characteristics, which can create confusion on the lender’s or borrowers’ end. Understanding the business ownership structure clarifies the legal responsibilities of a company. This includes all the legal responsibilities of business owners, such as paperwork, tax-related procedures, and the distribution of the generated revenue among the shareholders.
• A clear ownership structure helps owners understand their roles. For example, in the case where it faces a loss or goes bankrupt, the owners would know what solutions they have to come up with according to their power.
• Business ownership structure may change at any time. Ensuring a clear understanding of who owns a business is crucial to avoid delays in the transactions and other legal expenses.
• Different individuals have a different perspective on the ownership structure. In the scenario where there is money involved, knowing the hierarchical order of the owners is crucial. A straightforward ownership framework allows lenders to comply with relevant regulations and identify the Ultimate Beneficial Owners (UBOs).
• Applying for a loan is time-consuming. This is because a lender has to know about their client to ensure they are compliant. Ambiguity in the ownership structure may force lenders to repeatedly request additional client data, leading to unnecessary stress and delays. Understanding the ownership hierarchy helps businesses avoid stress and complications during the loan process.
• Some companies have extensive corporate structures. This adds so much confusion and incomprehensibility for the people involved with them. An ambiguous UBO chain can be indicative of potential crime and fraud. UBO identification helps a business navigate through layers and layers of shareholders, owners, and directors.

Identifying Ownership Structure

Finding out who really controls a business is key to compliance and risk management. Here are the steps to find beneficial ownership:

1. UBO Checks

UBO checks are key to understanding who benefits from an asset or business. This means verifying individuals who have 25% or more ownership or substantial control. Businesses should gather accurate documentation, such as shareholder records and trust deeds, to map out ownership layers.

2. Regulatory Filings & Global Business Registries

Regulatory filings such as annual reports and incorporation documents can give you insight into a company’s ownership structure. Global business registries can also help you track international connections and uncover hidden entities or offshore holders.

3. Advanced Verification Tools and KYB Systems

Advanced business verification tools and Know Your Business (KYB) solutions make it easier to find beneficial owners. These tools automate data extraction, cross-check information across multiple databases, and highlight discrepancies in real-time. This not only speeds up the verification process but also keeps up with changing regulations.

Role of The KYB in Simplifying Ownership Structures

At The KYB, we simplify ownership structures with our solutions. Even in jurisdictions where UBO data is not available, we can help you access the data on the real owners. With our enhanced KYB checks, we gather shareholder data and then manually simplify the intricate ownership structures. Get complete visualization of data and ensure compliance with KYB/AML regulatory standards and screen UBOs against sanctions, watchlists, or adverse media lists bringing reputational impact to your business.

Unraveling ownership structures used to be a tangled maze. Now, with The KYB, it’s a clear path to the truth, simple, swift, and powerful. Partner with The KYB to ensure seamless and secure verification of ownership structures.