Shareholders and directors are two very distinct roles within a limited company. In very simple terms, shareholders own the business and directors run it. The interesting thing, however, is that the same person can be both a shareholder and director. This means that you can set up and manage a limited company on your own, because you only need one shareholder and one director to form a company.
On the other hand, there is no statutory limit to the number of shareholders and directors a company has, so you can also register a company with one or more other people, and you can bring in new shareholders and directors after company formation, if you find that you need more help to run the business and/or required additional investment to grow the company. If there are limits imposed by the articles of association, or shareholder agreements (if applicable), then these limits will need to be adhered to.
There is no requirement for directors to also be shareholders, and shareholders do not automatically have the right to be directors. However, in most private limited companies, they are the same people. This flexibility in ownership and management is one of the many great things about the limited company structure. There are so many options.
The role of a shareholder
Shareholders are also known as ‘members’. The very first members who become shareholders during the company registration process are called ‘subscribers’. This is because they subscribe (add) their names to the memorandum of association, which formally records their intention to:
- Form a company under the Companies Act 2006
- Become a member of the company
- Take at least one share in the company
By becoming a member and taking at least one share in a limited company, a shareholder owns a piece of the business. If a company has just one shareholder, that sole person owns and controls the entire company.
Anyone can be a shareholder. It is also possible for non-human entities, such as limited companies, to be shareholders in another company.
What does a shareholder do?
Shareholders invest in a company by purchasing shares, each of which represents a certain percentage of the business. In return for owning shares, they are entitled to vote on company decisions and receive a portion of any profit generated by the business.
Shareholders do not make day-to-day decisions, unless they are also directors. Instead, they make decisions about exceptional matters, such as:
- Appointing and removing directors
- Altering a director’s powers
- Issuing or transferring shares
- Approving directors’ loans
- Authorising substantial company transactions in which a director has a personal interest
- Changing the nature of the business
- Altering the Articles of Association
Shareholders are also liable for company debts up to the nominal value of their shares. This is called ‘limited liability’. If the company has insufficient funds to cover its debts, the shareholders are legally obligated to contribute the value of their shares toward the debt.
The role of a director
Directors (who are ‘officers’ of the company) are appointed by shareholders to run the company on their behalf and try to make it a success. Directors may or may not be shareholders as well.
To be a director, you must be at least 16 years old. You cannot be a director if you are an undischarged bankrupt, the auditor of the company, or a disqualified director of another company. It is also possible for a corporate body, such as a limited company, the be the director of another company.
What does a director do?
Directors have a huge responsibility because it is their job to ensure the company is managed effectively and successfully, in accordance with the law, and for the benefit of the shareholders. This includes:
- Registering for Corporation Tax and VAT
- Preparing annual accounts and tax returns
- Paying company tax
- Filing confirmation statements
- Maintaining all business and accounting records
- Maintaining company registers
- Employing staff
- Operating payroll
- Ensuring all Health and Safety requirements are met
- Maintaining permits, licences, and certifications
- Reporting changes to Companies House and HMRC
- Managing company bank accounts and monitoring finances
- Ensuring all creditors and service providers are paid
- Organising shareholder meetings
- Keeping shareholders up-to-date with the state of the business
- Appointing auditors and accountants
- Issuing and recording dividends paid to shareholders
Directors must, at all times, dispense their duties and responsibilities to the company inline with the ‘Directors Responsibilities’ laid out in section 171 to 177 of the Companies Act 2006.
In some companies in which the directors and shareholders are different people, directors are sometimes given additional powers in the Articles of Association or permitted to make certain decisions upon written approval of the shareholders.
These type of decisions may include: authorising the transfer or issue of shares; appointing and removing a company secretary and other directions; authoring loans to directors, and authorising substantial transactions that a director has a personal interest in. Ultimately, however, shareholders always retain the power to choose how decisions are made and who can make them.