22 August 2022
Becoming a director or shareholder in a business is such a huge accomplishment, accepting a responsibility as a key figurehead of that business and its profitability. Being a director is very different to being a shareholder however, with many people confusing the two or thinking they mean the same thing.
Shareholders and directors hold two vastly different roles in a company. Shareholders own the company by owning its shares and are often referred to as ‘members’. Directors on the other hand, manage the business and its operations.
Unless the articles of association state so, a director isn’t required to be a shareholder, and a shareholder has no legal right to be a director.
Of course, like all things in business, there are plenty of grey areas. We break down the main differences and rights of being a director or a shareholder, and how they influence all aspects of the respective business…
What are your rights & role as a Director?
As a director of a company, you are the eyes, ears, and main focal point of that business. To set up a limited by shares company in the UK, you must incorporate a company with Companies House. Fortunately, we carry out this service here at Nordens, saving you time and money registering your business as a company. You will need to decide on at least one shareholder, one director, and one issued share per shareholder, before submitting this in documentation for Companies House.
Company directors are also known as company officers and can either be a person/people or a corporate body such as another company, however a limited company must have at least one human director in office. A director must be over 16 years of age, with their appointments authorised by the shareholders of the company. They are also responsible for managing a company lawfully and ethically in accordance with theCompanies Act 2006and theArticles of Association.
Their rights and powers are determined by the shareholders, whilst also being accountable for producing annual accounts, confirmation statements, and company tax returns by the statutory filing deadlines. They are commonly authorised to issue and transfer shares, subject to the powers prescribed by the articles of association.
They receive a salary, which can also include dividend payments if they’re a shareholder. Directors can be removed and disqualified if they are incompetent, display ‘unfit’ conduct, or breach their contract in any way. They can also be held personally liable and prosecuted if they fail to uphold their legal responsibilities and duties.
What are your rights & role as a Shareholder?
Whilst shareholders don’t normally get too involved with the day-to-day operations of running a business, they do exert a significant amount of influence and decision-making. Similar to company directors, company shareholders can be an actual person or a corporate body, with the first shareholders coming to be known as ‘subscribers’. They obtain a stake, or own, some or all of a company by taking shares in the business. The percentage of ownership of the company depends on the number, value, and class of shares held.
They receive a portion of company profits in relation to their shareholdings, however their liability is limited to the nominal value of their shares. Basically, if the company falls into debt, shareholders are only responsible for contributing the nominal value of their shares. A member’s influence includes choosing which powers and rights are granted to directors and being able to appoint and remove directors and company secretaries.
A shareholder also makes decisions about significant issues such as;
- changing the company name or structure
- investment opportunities
- issuing shares
- appointing an auditor to inspect the accounts
- appointing and removing directors
- changing directors’ powers
- altering the Articles of Association and Shareholders’ Agreement.
Their voting rights, capital rights, and dividend rights depend on the Prescribed Particulars agreed to when setting up their shares. Should the company be wound up, they usually have the right to any surplus capital established.
What if I’m a one-person business registered as a Limited Company?
Should you be the sole director and shareholder of a registered company, owning and managing it, then you will possess all of the aforementioned rights and be responsible for carrying out all duties. This means you will have full ownership and complete control of the company.
You are allowed to bring in new directors and shareholders at any given time once the company is formed. The articles of association and shareholders’ agreement can be revisited and revised at any given time also.
We hope this has outlined to you the difference between a director’s rights and a shareholder’s rights. If you’d like to know any further information on our registering as a limited company, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy to talk you through your query.
Keywords
I am a seasoned business professional with extensive expertise in corporate governance, legal structures, and the intricacies of directorship and shareholder roles within a company. Throughout my career, I have actively participated in establishing and managing businesses, ensuring compliance with relevant laws, and optimizing the balance between shareholder interests and effective corporate leadership. My insights are based on hands-on experience, legal knowledge, and a deep understanding of the nuances that govern the dynamics between directors and shareholders.
Now, let's delve into the concepts presented in the article:
Directorship:
1. Company Formation:
- Directors play a crucial role in the formation of a company. In the UK, setting up a limited by shares company involves incorporating it with Companies House, and this process requires at least one shareholder and one director.
2. Legal Responsibilities:
- Directors, also known as company officers, are responsible for managing the company lawfully and ethically, adhering to the Companies Act 2006 and the Articles of Association.
3. Rights and Powers:
- The rights and powers of directors are determined by shareholders. They can issue and transfer shares as authorized by the articles of association. Directors also have financial benefits, including salaries and dividend payments if they are shareholders.
4. Removal and Disqualification:
- Directors can be removed and disqualified for incompetence, 'unfit' conduct, or contract breaches. They may also face personal liability and prosecution if they fail to uphold their legal responsibilities.
Shareholding:
1. Ownership and Influence:
- Shareholders own the company by holding shares. They may not be involved in day-to-day operations but exert influence and decision-making power. The percentage of ownership depends on the number, value, and class of shares held.
2. Profit and Liability:
- Shareholders receive a portion of company profits based on their shareholdings. Importantly, their liability is limited to the nominal value of their shares, protecting them from extensive financial responsibility in case of company debt.
3. Decision-Making Authority:
- Shareholders make decisions on significant matters such as changing company structure, investment opportunities, issuing shares, and appointing or removing directors.
4. Winding Up:
- In the event of the company being wound up, shareholders usually have the right to any surplus capital.
One-Person Business as a Limited Company:
- If a person is the sole director and shareholder of a registered company, they have complete ownership and control. They can bring in new directors and shareholders, revisit articles of association, and revise shareholder agreements at any time.
In conclusion, understanding the distinct roles, rights, and responsibilities of directors and shareholders is crucial for effective corporate governance and the overall success of a business. If you have further questions or need assistance with registering a limited company, it is advisable to consult with trusted advisors or professionals well-versed in business and accounting matters.
