A shareholder and a director can be either be the same person or there can be multiple shareholders and directors. It is quite normal for one person to be both the shareholder and the director. However, the roles of each vary greatly.
In brief, the director manages the company. They are in charge of the day-to-day running of the business and tend to have a lot more responsibilities. On the other hand, the shareholders own and control the company.
For a company to have shareholders it has to be a limited company. More directors and shareholders have the opportunity for appointment any time after the formation of a limited company.
So, what exactly is a company director?
Every business has at least one company director, also known as a company office. They must be over sixteen years old. They can be either a person or another company.
The role of the director is to manage the everyday running of a business in a lawful manner. They must do so in accordance with the Companies Act 2006 and Articles of association. Directors are legally responsible for dealing with the annual accounts, confirmation statements, and company tax returns. They also employ staff, manage payroll, as well as keeping the shareholders updated amongst many other things.
A company director is legally responsible for these different activities. Therefore, should they fail to uphold their legal responsibilities, they are personally responsible. Unlike a shareholder, the director receives a salary.
How does a shareholder differ from the company director?
Unlike the director, the shareholder, also known as a member, is not responsible for the day-to-day running of the company. They make the bigger decisions made about the company. For example, the change of name of the structure, investment opportunities, or issuing shares.
In this regard, the director has a lot more responsibility when it comes to the business. However, it’s the shareholders that own the company, not the directors. The shareholders are responsible for appointing the directors but can also remove both directors and company secretaries. They also choose the powers and rights that the directors have.
How much of the company a shareholder owns is dependent on the value of their shares. They can own all or just part of the company. The profit their receive from the business is also dependent on the values of their shares.
Whilst like the directors they are liable for the business, their liability is determined again by the value of their shares. If the company goes into debt they would only have to contribute the value of their shares.
Also unlike directors, they do not receive a salary. They receive a portion of the profit that is made by their business and this is again in relation to their shares. The more shares they have in the company the more portion of the profit they will receive. This is paid in the form of dividends; this is a payment made from the company profits after the profits have been taxed. Therefore, whereas for the directors their salary is not dependent on the profit the company is making, for shareholders the company needs to be making enough profit for them to be paid dividends otherwise they cannot legally claim them.
What happens when you are both a shareholder and director?
It is possible for a company to have just one sole director and shareholder that is the same person, that person is then responsible for not only the day-to-day running of the company but also more of the behind-the-scenes responsibilities. Being both the director and shareholder means that person has complete control of the company and gets all the profits from the company. Once the company is a limited company it is possible to add more directors and shareholders further down the line.
If you have any questions about your company finances, get in touch with McCarthy Browne today.