Shareholder, Legal Representative and Beneficial Owner: what is the difference?

When establishing relationships with new companies, understanding who the key parties of the company are is essential not only for reasons of transparency, but also for compliance purposes and for managing commercial risk. 

It is essential, however, to distinguish three roles which, although they may coincide in the same person, belong to completely different domains: ownership, management, and ultimate control. Let us therefore look at who the Shareholder, the Legal Representative and the Beneficial Owner of a company are, and why it is important to be able to identify them.

Shareholder, Legal Representative and Beneficial Owner: definitions

Even though in some cases they may coincide, the roles of Shareholder, Legal Representative and Beneficial Owner of a company correspond to very distinct functions. 

Let us start with the definitions:

• the Shareholder is the person (natural or legal) who participates in the share capital, i.e. holds shares or ownership interests;
• the Legal Representative is the natural person who represents the company externally and who can perform legal acts (e.g. enter into contracts, sign official documents, etc.) in the name and on behalf of the company;
• the Beneficial Owner, introduced by anti-money laundering legislation (Legislative Decree 231/2007), is the natural person who owns or controls the company and who ultimately benefits from its activities.

The relationship of these three figures with the company concerns different domains: while the Shareholder operates in the context of ownership, the Legal Representative is linked to responsibility for management, and the Beneficial Owner to the ultimate economic benefit. 

Who is the shareholder: rights and responsibilities

The Shareholder is the one who, by acquiring part of the company’s ownership, ties their economic destiny to that of the company. As an investor, the Shareholder has the right to receive part of the company’s profits (the dividends), and as a member of the Shareholders’ Meeting has the right to vote (in proportion to their shareholding) on fundamental decisions such as the appointment of directors and the approval of the financial statements.

By participating in the share capital, the Shareholder also takes part in the business risk. Here, however, it is worth making a crucial distinction: in capital companies, such as S.r.l. and S.p.A., the Shareholder’s liability is limited to the capital contributed (limited liability). This means that any debts will not affect the personal assets of the natural persons involved. 

In partnerships, on the other hand, the liability of the partners is “unlimited and joint”: this means that if the company’s assets are not sufficient to cover its debts, creditors may seek recourse against the partners’ personal assets.

A particular case within capital companies is that of the Single-Member Company: here, when the party holding 100% of the shares is a natural person, they almost always also hold the role of Legal Representative and Beneficial Owner, but with different legal and liability implications.

Who is the Legal Representative of a company?

If the Shareholder is the one who puts in the money, the Legal Representative is the one who puts their name (and more) on the line. Their role is in fact to act in the name and on behalf of the company, assuming the civil, criminal and tax liabilities arising from the company’s activities and business decisions.

In S.r.l. companies, the role of Legal Representative is generally held by the Sole Director or the Chairman of the Board of Directors, while in S.p.A. companies it may be assigned to the Chairman of the Board or the Chief Executive Officer. In partnerships such as Snc and Sas, on the other hand, it coincides with the managing partner. 

In most small businesses, the director also takes on the role of Legal Representative. The two functions, however, do not necessarily coincide: while management concerns internal company operations, legal representation essentially concerns relations with third parties. 

The legal representative is therefore not necessarily the person who determines the company’s strategy, but they are certainly the only person who can bind the company vis-à-vis third parties, for example by signing contracts, taking out loans or formalising the hiring of new employees.

Who is the Beneficial Owner of a company?

The concept of Beneficial Owner was introduced by anti-money laundering legislation (Legislative Decree 231/2007) to identify the natural person who benefits from the activity and therefore exercises real control, which may not emerge from formal corporate structures.

To identify the Beneficial Owner, the following criteria are applied, in order:

• Ownership: the Beneficial Owner is the natural person who owns, directly or indirectly, a shareholding of more than 25% of the share capital;
• Control: if no shareholder holds more than 25%, the control criterion applies, which identifies the owner as the natural person who exercises control over the company, for example by holding the majority of voting rights at the shareholders’ meeting or special rights based on specific agreements and contractual constraints;
• Residual criterion: if it is not possible to identify who exercises control, the residual criterion is applied. The Beneficial Owner is therefore identified as the natural person who holds the position of legal representation, management or direction of the company.

Identifying the Beneficial Owner serves to identify the natural person who ultimately controls a company’s operations, in compliance with laws and regulations aimed at combating financial crime and the financing of terrorism. 

Shareholders, Legal Representative, Beneficial Owner: why it is important to know them

For entities such as banks, accountants and lawyers, knowing the corporate structure and identifying the natural persons who manage and control companies is a legal obligation. Among the requirements set out by anti-money laundering legislation are the identification of the Beneficial Owner (to prevent the use of shell companies for money laundering and other crimes) and Customer Due Diligence, i.e. the identification of the legal representative, who is then the “customer” establishing the new relationship.

Knowing this information, however, is also essential for business partners, customers and suppliers. In order to know who to deal with when signing agreements and contracts, it is necessary to know the company’s legal representative, while an overall view of the shareholder structure is crucial when it comes to assessing the financial soundness of a company.

Knowing the Beneficial Owner of a company, on the other hand, is essential when there is a need to assess the ethical integrity and reputation of a party you are dealing with for the first time.