The formal side of the business is not only about law requirements a legal entity should meet but also about who can be a company owner. When it comes to corporations, company owners are called shareholders. What is a shareholder ? Who can be a corporation shareholder ? What’s the shareholder’s function in the company? What rights do shareholders have? In our article, you’ll find answers to these and other questions related to corporate ownership. You’ll get all the info you need to know if you are going to own a share in a corporation.
Definition of a “Shareholder”
Most often than not, corporations imply shared ownership and allow for a nearly unlimited number of members. Unlike an LLC capital made up by the member’s contributions, the corporation’s equity is equivalent to a certain number of shares that are further split between the company members proportionally to the money they’ve invested in a company. Actually, these are shares that establish corporate ownership. Accordingly, a shareholder is an entity that owns shares in a corporation. It could be either an individual or a legal person. Shareholders are also called stockholders and are often used interchangeably with stakeholders. Yet, while the first two terms really mean the same, the latter is a different notion. Unlike shareholders, stakeholders don’t have partial ownership in the company, they rather have interest in the business operation and not necessarily a financial one.
Usually, shareholders receive special certificates confirming their ownership and showing the number of shares they own. Likewise, they get dividends from the company’s income as soon as the business brings stable high profit. Speaking of the management hierarchy, a shareholder could either remain solely a business owner or also perform the functions of a director or manager and handle daily business operations. For the sake of truth, though, it’s worth saying that such situations are more characteristic of smaller businesses and startups. In bigger corporations, shareholders do not get involved in business routines.
Being a Shareholder: How Does It Work?
Being a shareholder means being a company co-owner, which in turn imposes certain responsibilities depending on the corporation type and the number of shares you have.
By the type of ownership, corporations fall into close and public ones. In close corporations, shares are normally split between a limited number of owners, which personally know each other and often are even family members or relatives. In most cases, these are private companies, and owners directly manage and control the business. Public corporations are characterized by the fact that shares can be distributed among millions of different shareholders. Such companies are usually required to regularly disclose their financial and business data to the public. Their shares often circulate at a stock exchange. And public corporation shareholders are common investors taking no direct participation in the business management and operation.
Coming down to the shareholder income taxes, basically, shareholders are to pay taxes on dividends and on capital gains. Paid from corporate revenues, dividends are taxable on their personal tax returns as ordinary income. Capital gain is a shareholder’s income from the sale of his/her shares. It’s also reported on a personal tax return and the tax rate varies depending on how long the shares are owned.
Corporations have more obligatory internal regulations than other business entities that ensure overall company compliance. One of such important regulations to match is holding an annual shareholder meeting. That meeting is to be held once a year on a regular basis and can be called out of schedule if some crucial decisions are to be made. No matter the number of shares they own, shareholders can attend those meetings in person or ensure their presence by proxy to eligibly vote on important aspects.
Similar to LLC members, shareholders are not held personally liable for the company debts and legal problems. So, their personal assets and belongings are not put at risk. However, in case of corporate bankruptcy, shareholders as company owners will be the last to receive any indemnification, with creditors and suppliers preceding them. In other words, they lose their share value if a corporation goes bankrupt.
Shareholder Roles in a Corporation
While for many entrepreneurs, corporate ownership is mostly about gaining profit, being a shareholder is more than that. In big corporations, day-to-day management is normally delegated to executive directors and managers, with a board of directors to manage daily operations and report to the shareholders on that. Yet, key strategic issues still remain within the shareholder authority. So, the shareholder functions cover the following points:
- Appointing and removing the company managers, as well as deciding on the scope of their powers and authorities;
- Determining the level of compensation to company directors and key executives. The indemnification should ensure a decent level of living and match the company’s expense limits;
- Settling the issues beyond directors’ authority. Normally, these are fund-raising and investment issues along with expenses exceeding some stipulated level and amendments to the company structure;
- Handling routine control issues, i.e. reviewing annual financial statements and any internal reports that might be deemed necessary.
Types of Corporate Shareholders
By and large, we can distinguish between common and preferred shareholders by the type of stock they own. From the start, most corporations issue common stock that gives shareholders voting rights over vital company issues, allow them to control company management and even sue the company for any potentially risky actions that can harm the business.
Preferred stock, on the other hand, offers stockholders a priority over common shareholders in the dividend distribution. Thus, while common shareholder dividends directly relate to the company profits, preferred stockholders obtain dividends at fixed rates. It means when a company experiences losses, those losses will be imposed on common shareholders as well. And preferred stockholder dividends will remain unaffected. More than that, this privilege also extends to the bankruptcy situation. Preferred shareholders won’t lose the value of their shares and can even claim assets as compensation.
Obligations and responsibilities aside, corporations shareholders gain a whole bunch of rights when acquiring corporate ownerships. Those are outlined and secured in the corporation statutes and by-laws and cover such rights as:
- Information rights: Shareholders are entitled to get any data and records related to the company management and financial performance they deem necessary. What’s more, most of those data are to be made publicly available under law requirements;
- Voting rights: This is common stock that provides shareholders with voting rights crucial for making core business decisions. This type of stock is usually issued by all corporations to ensure diligent and unbiased business governance and control;
- Meeting rights: Annual shareholder meetings are a legal requirement a corporation can’t skip. Those meetings are to be conducted to maintain the company in good standing with the state by approving financial statements and deciding on fundamental business issues. Such meetings are especially important for bigger entities with multiple shareholders where internal conflicts are more likely to arise. Meanwhile, small corporations with only a few co-owners could resolve those issues in writing (under unanimous consent of all shareholders) and refrain from calling for a meeting;
- Proposal rights: Apart from some compulsory routine issues, the shareholder meeting agenda could contain the issues proposed for a review by shareholders. To propose an agenda item, a shareholder should own at least 1% of the stock or a number of shares worth no less than $2000;
- Dissenter rights: More pertinent to bigger public corporations than smaller private corporations, dissenter rights are meant to deliver an added shield to company shareholders. These rights allow the shareholder to make the company buy back his/her share, should any disagreement with key general management decisions occur.