What is a shareholder?

What is a shareholder?

Limited liability companies in the UK can either be limited by shares or by guarantee. When they are limited by guarantee, they are known as CLGs (Company Limited by Guarantee) and when they are limited by shares they are known as LLCs or LTDs.

Obviously, companies limited by shares are the ones who have shareholders since the shareholders must provide money to purchase shares or stock in the company before or after it has been incorporated. One or more shareholders is legally required for the incorporation of a company limited by shares.

A shareholder is therefore a part-owner of a limited company or organisation in that they own shares or equity stocks in the company. A shareholder can be a person, a group of persons, another company, or any other corporate organisation. Shareholders are also sometimes called members.

What do shareholders do?

The UK company law gives the shareholder rights over the company simply through the power of voting. For example, they can

• remove or change the board of directors by simply having a majority vote.
• modify the company constitution with at least a three-quarter overall vote (except if the company constitution expressly states a higher number of votes)
• decide how much power to award the directors
• choose to liquidate the company with a three-quarter vote
• overrule or veto the sale of company assets
• set the salaries of directors.

How many types of shareholders exist?

Two main types of shares or stocks can be issued by a company each with differing levels of rights and authority in the company. We will endeavour to shed light on these different types here.

1. Ordinary or common shares are the most common type of shares issued among companies.

This type of share has no limited rights and its modus operandi is usually defined in the company’s article of association. The number of shares equals the number of votes with this kind of share. The shareholders with this kind of stock are paid last in case of insolvency or company liquidation. Although, they are the ones who decide how to divide the company’s assets in such cases.

2. The preferred or preference shares are the kind of shares that are issued to investors mostly. This is because they have preferential treatment when assets are getting divided in case of company liquidation. Their dividends are paid first. However, they usually do not have voting rights except otherwise stated in the article of association.

Also, the preferred shares can be bought back from such investors in the future by the company, hence the reason why it is sometimes referred to as redeemable shares.

Any other type of shares are variations of the common or preference shares.

3. The management shares give their holder an additional right to manage the company in one capacity or the other.

4. The alphabet shares are just an alphabetic ordering of the importance of shares or stock issued by the company such that the A-shares rank higher than the B-shares and so on.

5. Non-voting shares are usually issued to employees or family members of the main shareholders as a means of increasing the number of shareholders so that the main shareholders can retain control. As the name implies, these shareholders do not have a right to vote in the company.

What are the advantages and disadvantages of becoming a shareholder?

Depending on the kind of shares you are holding, there are some benefits and disadvantages.

Advantages

• You have a right to inspect the company’s financial records
• You get paid dividends which appreciate as the company profits
• Depending on the shares you are issued, you have a voting right
• You are part of the decision-making body of the company
• If you roll back your equity stock into the company, you can avoid paying tax on those until a future date

Disadvantages

• You may run at a loss, partially or completely, if the company fails.
• Your rights are dependent on the type of shares of stock you bought as well as the provisions made for it in the company’s article of association.

How to become a shareholder?

You can simply become a shareholder by buying into a start-up company as a main shareholder or investor. The more shares you buy, the more rights you have in the company, and the more your interest or returns on investments in the form of dividends.

In conclusion…

Becoming a shareholder has more benefits than cons especially if you are one of the main shareholders.