What is the difference between a Director and a Shareholder?

What is the difference between a Director and a Shareholder?

It may surprise you (or not) that there really is a difference between being a Director and a Shareholder, in our article today we are going to take a look at what just some of those are.

We review Director and Shareholder agreements daily, some can be pretty scary, to say the least, I presume some of these have been chosen or picked up from the internet, downloaded without realising that they are not fit for purpose, or perhaps the person providing them has little knowledge of what the content should be either. In any event, they can lead to a whole host of issues.

We also take a look at shares, what they are, voting rights, dividends, what they are, and legal obligations under the Companies Act 2006.

Firstly, let’s take a look at what a Shareholder really is, what they are not, and what they can and importantly cannot do.

 

Directors and Shareholders, what is the difference?

It is important to remember that there is a difference here, the Director/business owner running and managing a Limited Company (business), is not necessarily the person who ‘owns and controls’ the entity. The person/people who own and control the Limited Company are those who have purchased one or more shares, these are the shareholders.

You will note we mention ‘control and ownership’, how much of this a shareholder has will be dictated by the volume, the class of their shares, and any other dictation within the Shareholder Agreement, or Company’s Articles of Association.

The shareholders can then appoint Director/s to manage and run the company and do so on behalf of the shareholders.

Now, the Director/s can be but does not have to be, shareholder/s, similarly, the director/s can, but do not have to be Employee/s; let’s say the Director/s are to be classed as Employee/s and paid a salary (PAYE) then they must have a Contract of Employment.

Director/s who are made Director/s who are made redundant are entitled to claim Statutory Redundancy Payments, in this instance Director/s who can prove their status as an Employee of the business may qualify for a number of statutory payments.

The Director/s will only be classed as shareholder/s if they have purchased or been gifted, shares in the Limited company. If the director/s are not shareholder /s then none of the shareholder benefits – such as dividends will be applied to them.

 

What are the legal obligations, shares, and dividend payments?

As part of the Companies Act 2006, upon appointment and as part of their role Director/s have a legal duty to act in the company’s best interests and to promote overall success, they have a responsibility for the growth and development of the business. As non-shareholding Director/s, they will not be entitled to a share of the profit (as dividends); instead, shareholders can elect taxable bonuses to be issued and paid to the Director/s.

When forming a new Limited Company, you will need to set up the Shareholder Agreement, or the Company’s Articles of Association, it is at this stage you will need to decide on share allocation, you may decide to attribute different rights to different shareholders, this can be done by creating unique share classes, for example, ‘a and b’ shares. The assigned rights for a given share class can vary but often seek to modify voting power or a shareholder’s claim to any distributed profits.

Shares are usually ranked ‘pari passu’, which means “on an equal footing“, share classes provide the means to differentiate any rights or restrictions for each shareholder, or group of shareholders.

Here is a little more on shares:

 

Entitlement to dividends

Allocating shares can be formatted in many ways, by providing the right to a normal dividend, a preferential dividend (paid before other share classes), maybe even a dividend to be distributed in certain circumstances, or no dividend at all.

 

Voting Rights

You should consider voting rights, and do so by adding to Contractual agreements, rights such as shares either carrying voting rights or not, or weighted, or tiered votes are possible in certain circumstances.

 

Entitlement to capital on winding up/disposal

It is imperative and whilst not something often thought of when setting up, but if the Company is wound up that provisions need to be considered for any assets left after all debts have been paid off, that these can be distributed to shareholders. Different classes of share may have different rights to capital distribution.

 

Of course, it is in the best interest of shareholders for Director/s to perform in their duties, that way they can issue dividends out of distributable profits to shareholder/s; conversely, whereby an overall loss is made during the year, there will be no profit to distribute and therefore no dividends; any loss remains in the retained earnings until sufficient profit has been generated to contra the loss; when the Company becomes profitable, the following year; but has not generated sufficient profit to cover the loss sat in retained earnings; then the shareholders will still not be able to declare any dividends as there will not be any distributable profits until the profits generated exceed the loss sat in retained earnings.

 

 

 

How can we help?

We are experts dealing with your contractual obligations and agreements, we can assist you with advice, guidance and support, should you require agreements creating bespoke to you and your shareholders we are experts in this area; you can contact one of our team today and we can assist you; contact us on: 0333 0069489 or email us on: [email protected]

 

 

 

 

Disclaimer

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