A shareholder is a key part of any company structure. But what exactly does being a shareholder entail, and what rights and responsibilities come with it? In this guide, we'll explore everything you need to know about shareholders, including their role, the types, and how to become one.
What is a shareholder?
A shareholder is an individual, company or institution that owns at least one share of a company’s stock. Owning shares means the shareholder has a financial stake in the company. Typically, this also comes with certain rights and responsibilities. Shareholders can benefit when a company performs well, usually through dividends (a portion of the profits) or an increase in the share's value. They may also face losses if the company underperforms.
đź’ˇEditor's insight: "You'll see shareholders often called 'members'. The first members in a company - the people who register the business - are also known as 'subscribers' because they subscribe their names to the memorandum of association during the formation process."
Can anyone be a shareholder?
Yes, anyone can become a shareholder. All that's needed is to purchase shares and meet any specific eligibility requirements of the company. Shareholders can be:
Individuals (both adults and minors, although minors may need a trustee)
Companies (corporate shareholders)
Investment groups or funds
Limited company shareholder responsibilities
Shareholders play a crucial role in the ownership and governance of a company. Their responsibilities vary depending on the company type and the shareholder agreement.
What rights do shareholders have?
Shareholders in the UK are typically entitled to:
Voting rights: To influence company decisions, like electing directors or approving major changes.
Dividend rights: To receive a portion of company profits (if declared).
Access to records: To inspect the company’s financial statements and certain records.
Rights to attend general meetings: To participate in Annual General Meetings (AGMs).
Rights to transfer shares: To sell or transfer ownership of their shares.
💡Editor's insight: "I find most people aren't aware, but the Companies Act 2006 defines the rights of a shareholder. However, it’s also important to check your company’s articles of association to see if the shareholder rights have been edited. If you're not sure, you can check for free using the Companies House search the register tool."
What are their responsibilities?
Shareholders are usually not involved in daily management but are responsible for:
Contributing capital by purchasing shares
Upholding agreements outlined in the shareholder or company constitution
Making decisions on major business matters, such as mergers or acquisitions
Can a limited company shareholder also be a director?
Yes, a shareholder can also serve as a director. In fact, it’s common for small businesses to have directors who are also shareholders. For example, you can own and manage a company by yourself if you're the sole shareholder and director. There can also be more than one owner and director, like in the case of a family business.
However, shareholders and directors are not the same thing. In general:
Shareholders own part of the company
Directors manage the company’s day-to-day operations
What duties do company directors have?
When you become a director, you take on important responsibilities under The Companies Act 2006. These duties are designed to ensure directors act in the best interests of the company and its members. There are seven key duties every director must follow:
Use powers responsibly: Act within the limits set by the company’s constitution and use your powers only for their intended purpose.
Promote the company’s success: Make decisions that benefit the company’s members as a whole.
Be independent: Exercise your own judgement when making decisions.
Act with care and skill: Apply reasonable care, diligence, and relevant expertise in your role.
Avoid conflicts of interest: Always put the company’s interests ahead of personal gain.
Don’t accept improper benefits: Refuse any benefits from third parties that could compromise your impartiality.
Be transparent about interests: Declare any personal interests in transactions or arrangements the company is considering.
Types of shareholders in business
Shareholders can be categorised based on the type of shares they own and their relationship with the company. Common types include:
Ordinary shareholders
Ordinary shareholders are the most common type of shareholder. They own ordinary shares, which typically come with voting rights at company meetings and the right to receive dividends. While ordinary shareholders can gain the most in terms of capital appreciation and dividends, they also bear the most risk. In particular, they are last in line to receive payouts in the event of liquidation.
Voting power: Ordinary shareholders usually have the right to vote on significant company matters, like appointing directors or approving mergers.
Dividend potential: Dividends for ordinary shareholders are variable and depend on the company’s profitability.
Preference shareholders
Preference shareholders hold preference shares. These often provide a fixed dividend that is paid before ordinary shareholders receive any dividends. Preference shares are a good option for investors looking for steady income with less emphasis on voting power or capital gains.
Priority payments: In the event of liquidation, preference shareholders are paid after creditors but before ordinary shareholders.
Limited voting rights: Preference shareholders typically do not have voting rights, except under specific circumstances (like when their dividends are in arrears).
Majority shareholders
A majority shareholder owns more than 50% of a company’s shares, giving them substantial control over business decisions. Majority shareholders play a critical role in shaping the company’s future, but their actions must still comply with shareholder agreements.
Influence over decisions: Majority shareholders can often dictate the direction of the company. This might include appointing directors and approving or vetoing major business strategies.
Common in private companies: In smaller private companies, a founder or a small group of individuals often hold the majority of shares, retaining control of the business.
Minority shareholders
Minority shareholders hold less than 50% of the shares in a company and, as a result, have limited influence over decision-making. Minority shareholders are more common in larger companies, where shares are distributed across numerous investors.
Rights and protections: Although they have less control, minority shareholders are entitled to protections under UK law. This includes the right to challenge unfair practices or decisions that harm their interests.
Financial benefits: They still enjoy dividends and capital gains based on the company’s performance.
Corporate shareholders
Corporate shareholders are companies or institutions that hold shares in another business. Corporate shareholders often have significant influence, especially when they hold a large portion of shares.
Strategic investments: Corporate shareholders often invest in businesses as part of a strategic plan, such as forming alliances, securing supply chains, or accessing new markets.
Long-term relationships: These shareholders typically aim for long-term gains and synergies rather than short-term profits.
Founding shareholders
Founding shareholders are the individuals or groups who start a company and receive shares during its initial formation. As the company grows, founding shareholders may choose to sell or dilute their shares to raise capital.
Ownership stakes: Founders often hold a large percentage of shares, especially in private companies.
Involvement in operations: Founding shareholders may also serve as directors or executives, actively managing the company.
Employee shareholders
Employee shareholders receive shares as part of their employment package or through company share schemes. Employee shareholders typically hold a minority stake.
Equity-based rewards: These shares can be offered as bonuses or part of profit-sharing agreements.
How many shareholders can a company have?
The number of shareholders a company can have depends on the company type:
Private limited companies | Public limited companies |
|---|---|
Typically have a small number of shareholders, often family members or close associates | Can have an unlimited number of shareholders |
No upper limit, but the shares cannot be sold to the public | Shares are publicly traded, allowing widespread ownership |
Do shareholders get paid in the UK?
Yes, shareholders can earn money through:
Dividends: Shareholders may receive a share of the company’s profits if the directors declare dividends.
Capital gains: Selling shares at a higher price than they were purchased can generate profits.
Payment frequency and amounts depend on the company’s performance, dividend policy, and shareholder agreements.
Do all companies pay dividends?
Not all companies pay dividends. Only companies with share capital, such as public limited companies (PLCs), private companies limited by shares, and private unlimited companies, are eligible to issue dividends.
How to become a shareholder
Becoming a shareholder is straightforward, whether you’re investing in a private or public company. For tailored advice, get in touch today with one of our buy a business solicitors.
For public companies:
Purchase shares through a stock exchange, using a brokerage account or investment platform.
Shares can be bought individually or as part of investment funds.
For private companies:
Buy shares directly from the company or its existing shareholders.
Private companies often have specific eligibility criteria for new shareholders.
Start your own business:
By registering a company and issuing shares, you can become its sole or joint shareholder.
FAQs
What is a shareholder in simple terms?
A shareholder is someone who owns part of a company by holding shares. Shares represent a portion of the company’s ownership, giving shareholders a financial stake in its success or failure.
What’s the difference between a shareholder and a stakeholder?
While shareholders own part of the company, stakeholders are anyone affected by the company’s actions, such as employees, customers, and suppliers. Shareholders are always stakeholders, but not all stakeholders are shareholders.
Final thoughts
Shareholders are integral to a company’s success, providing essential funding and having a say in major decisions. Whether you’re a small-scale investor in a private company or a shareholder in a publicly traded corporation, understanding your rights and responsibilities is vital.
Becoming a shareholder can be a rewarding way to contribute to and benefit from a business’s growth. If you need legal advice about starting a business, get in touch with one of our corporate solicitors today and see how we can help.
References
Running a limited company from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.