When dealing with a private limited company, you will encounter the term “company shareholders”. Shareholders are also sometimes called “members”, and play a vital role in the formation of any private limited company.
What is a shareholder?
A shareholder by definition owns a part of the business. They do this through purchasing shares in the company, and while they own the business, they do not run it – this duty falls to the director. A shareholder may choose to also be a director, but you do not have to be one to be the other. These roles operate independently of each other, and there are a number of differences between the two (outlined below).
The difference between directors and shareholders
These two roles are substantially different, and it is important to have an understanding of the part each plays in the formation of a limited company:
Shareholders
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A shareholder, also known as a member, owns the business through the purchase of shares. The liability of a shareholder depends on the amount they hold in shares.
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Shareholders are not directly responsible for the everyday running of the business, but issue powers, rights and responsibilities to their company director.
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Shareholders can however, make important decisions about the way the company operates as a whole. This includes changing things like the company name or structure, or ordering an audit of the company accounts.
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Shareholders can appoint and remove directors, though in any director removal any Service Contracts and the removal procedures outlined in the Companies Act should be considered.
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The first (founding) shareholders are also known as subscribers, and their information will remain on public record even if the company dissolves.
Directors
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A director, also known as an officer, is responsible for running the business in accordance with all governance laid out in Companies Act 2006.
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A director can also be a shareholder in the business.
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A director must be at least 16 years of age, and must not have been previously disqualified by Companies House from the position of director. Shareholders can appoint a director at their discretion, and can decide which rights and responsibilities they will hold.
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A director must operate ethically, legally, and in the best interests of the business at all times. This means promoting methods of making a profit to benefit customers and shareholders alike.
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A director is paid a salary, rather than a dividend (unless the director is also a shareholder, in which case he will likely take both, arranged in the most tax efficient manner).
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A director must file annual company accounts and annual returns, and pay Company Tax Returns on behalf of the company by all relevant statutory deadlines.
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A director can be removed or disqualified, and held personally liable for negligence, breach of contract, or illegal activity whilst occupying their position with the company.
It is possible for a single person to occupy the position of both sole shareholder and director, and in which case, all of the above responsibilities would fall to them. It is this scenario that working alongside accountants, formation agencies, company secretaries and other supporting bodies can be incredibly beneficial.
What are shareholder's powers and responsibilities?
Limited company shareholders have a number of responsibilities, the first of which is parting with capital to purchase a stake in the business. Once they have invested in a limited company, a shareholder can have a number of other powers and responsibilities:
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Shareholders are allocated a portion of available profits in the form of dividends, the amount of which will be determined by the directors and paid in accordance with the rights attached to the shares, usually in proportion to their shareholding in the company.
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The shareholders have ultimate power over the company's constitution and have to authorise any changes to it.
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Shareholders can set the salary of the director, and also have a say in the amount of power and authority they have.
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Shareholders can appoint limited company directors.
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Shareholders have a say in the allotment of shares, and can vary the rights attached to the shares.
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Should the company be wound-up, shareholders will be entitled to a portion of any surplus capital.
