Shareholders and directors are two very distinct roles within a limited company. In 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 a 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 private limited company in the UK.
On the other hand, there is no statutory limit to the number of shareholders and directors a company can have. You can register a company with other people, and you also can bring in new shareholders and directors after company formation, for example, if you need help to run the business or require additional investment to grow the company.
However, companies can choose to impose limits on the number of shareholders and directors they can have. Such provisions must be stated in the articles of association or shareholder agreements (if applicable).
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.
The role of company shareholders
Shareholders are also known as ‘members’. The very first members (i.e., those who become shareholders during the company formation 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 other companies. They are known as corporate shareholders.
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, members are entitled to vote on significant 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 a director’s loan
- 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, members are legally obligated to contribute the value of their shares toward the debt.
The role of company directors
Company directors, also known as ‘officers’, are appointed by members to run the company on their behalf and try to make it a success. Directors may or may not be shareholders.
To be a director, you must be at least 16 years old. However, 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 significant responsibilities. It is their job to ensure that companies are managed effectively and successfully, in accordance with the law, and for the benefit of their members. The duties and responsibilities of company directors include:
- Registering the company for Corporation Tax and VAT
- Preparing annual accounts and tax returns
- Paying business taxes to HMRC
- 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 general meetings of the members
- Keeping shareholders up-to-date with the state of the business
- Appointing auditors and accountants
- Issuing and recording dividends paid to shareholders
Directors must dispense their duties and responsibilities in line with the ‘Directors Responsibilities’ laid out in section 171 to 177 of the Companies Act 2006.
In some companies, typically those in which shareholders and directors are different people, the articles of association prescribe additional powers to directors or at least permit the directors to make certain decisions upon written approval from members.
These types of decisions may include:
- authorising the transfer or issue of shares
- appointing and removing a company secretary
- authorising directors’ loans
- authorising substantial transactions in which a director has a personal interest
Ultimately, however, shareholders always retain the power to choose the way in which decisions are made and who can make them.