Shareholders and directors each have unique roles and responsibilities within a company, yet people often confuse the two. As we discuss this in the episode, we aim to clarify these distinctions for UK companies. However, these principles apply broadly to companies outside the UK as well.

Defining Shareholders and Directors

Firstly, shareholders are the actual owners of the company, holding shares that signify their ownership stake. They may be individuals or entities, and their liability typically extends only to unpaid shares. Comparatively, directors handle the day-to-day management of the company. Appointed by shareholders, they implement strategy, make decisions, and hold legal responsibilities in line with the Companies Act.

Roles and Responsibilities

Shareholders’ Roles

Notably, shareholders primarily provide investment and vote on significant decisions, including director appointments and any alterations to the articles of association. Consequently, they share in company profits through dividends. Their role remains generally passive in day-to-day operations unless they also serve as directors.

Directors’ Responsibilities

Directors, on the other hand, have an active role, managing daily operations, hiring staff, and negotiating contracts. Additionally, they hold legal obligations to act within their powers, promote company success, and avoid conflicts of interest. Any breach of these duties could result in personal liability, especially in cases of wrongful trading.

Financial Benefits

Shareholders benefit from dividends and any capital growth over time, while directors may receive salaries, bonuses, and other benefits. This separation clarifies both parties’ financial stakes and obligations within the business.

Summing It Up

Altogether, shareholders own the company, providing investments and voting on major decisions, while directors manage daily operations and uphold legal responsibilities. Although these roles may overlap in smaller companies, understanding each role's distinct duties fosters smoother company operations.

To gain more insights into managing roles and responsibilities in your business, listen to the I Hate Numbers podcast

My experience of dealing with companies is that many people don't differentiate between the role of a shareholder and that of a director. Now that distinction is more prevalent when it comes to private companies i.e. ones that have shareholding as opposed to companies limited by a guarantee, which is a popular model for the not-for-profit sector and those who demonstrate an element of social enterprise. In this week's podcast, I'm going to be focusing on understanding the key differences between a UK company shareholder and a UK company director. Please note, by the way, folks, if you're running a company outside of the United Kingdom, a lot of the principles and the points that are being made in this podcast are likely to apply to your situation. Now it's really important to understand the difference between a shareholder and a director.

Both play crucial roles, but they have different responsibilities and different rights. That has an impact both in legal terms, but also in accounting and tax terms as well. Let's crack on with it.

So firstly, who are they? Well, the shareholder is the actual owner of the business, the owner of the company. That shareholder can be an individual, it can be an entity like another company that owns shares either in full or in part of the company concerned. So if you do own a company, it’s possible that the ownership of that company, your company can be split between different parties and those parties can be individual or can be other companies itself. Now a shareholder, the owner, can be referred to as the investor, will invest money in the company, and in return they owe in legal terms a proportion of that company. Now a director, on the other hand, is the manager of the company, the manager of the business. They are typically appointed by the shareholders to run the company, and they typically will be responsible for making decisions about how the company is managed on a day-to-day basis.

Now for typical small businesses, which might have one or two directors, typically it's the directors and the shareholders may be one of the same people, but nevertheless, there is still that distinction between the two parties. Let's talk about the roles and responsibilities. Now a shareholder is the one that provides the investment provides the funds in buying shares, they also have the legal rights to vote.

00:02:2

They vote on those important company decisions, typically at shareholder meetings. Now it's not unusual for the businesses that I meet that don't actually have those meetings when things like dividends are paid out, when there's a change in the composition of directors, technically speaking, that's enshrined within the company's act,

and in next week's podcast, I'm going to be expanding and looking at some of those forms in more detail. And in our capacity as offering business services, secretarial services here, we make sure that our client companies have the relevant paperwork, have the relevant documentation to back up those decisions. Now shareholder is entitled to share of the profits. Those profits typically are expressed in the form of dividends.

So shareholders receive from the company dividends that are paid out. Now a director, on the other hand, the management of the company - they will run the company that make the everyday business decisions, who to hire, who to fire supplies to go with customers they deal with, and they have legal responsibilities placed on their shoulders to follow the laws of the land and to act in the company's best interests. They are the ones who set the company's strategy.

They are the ones who dictate the company's operations. Let's look at the legal duties in more detail. Now, the shareholder has what's called unlimited legal obligations. So, i.e. if things go wrong and the company is facing debt, the liability of the shareholder, which is one of the attractive points to a shareholder, is that their liability is limited to anything that's been unpaid on their shares they've acquired.

Now, typically for most small businesses, their share capital at the start could be a pound, a dollar, a hundred pounds. If that hasn't been paid over, then that's the liability they still have, if things go wrong. Now, a director, on the other hand, does have legal responsibilities typically in line with the company's act.

And those duties include acting within their powers, promoting the success of the business, the company, being independent in their judgement-making, avoiding conflicts of interest, being diligent and careful in their role, and the liability itself. Now, a director can be appointed, but also can actually, if they're not actually appointed can be classified as a shadow director, a topic for another day. Let's look at the decision-making powers. Now with the shareholder, they will make the major decisions, and they vote on things like who to be appointed as a director, who to remove, alterations to the company's articles of association, and obviously the more shareholding a shareholder has, the more influence they actually do exercise.

Now, a director, on the other hand, makes those operational decisions, handles the day-to-day management, puts into action the strategies and policies, can enter into contracts on behalf of the company. And perversely, by the way, they are the ones who make that decision about what dividends to actually appropriate to pay out to shareholders. Now talking about let's look at the financial benefits. Now shareholders will typically receive a share of the profits in the form of dividends, and it's for the directors of the company to decide when to make those distributions, when to make those payments, and where appropriate, the investor, the shareholder, is the one who benefits from any increase in the value of the company over time.

So if a company started and several years later it creates value and you decide you want to sell it as an investor, any growth in that share value accrues to the investor, accrues to the shareholder. And that's what's known as capital growth. Now, a director - their financial benefits are the salaries they get for their role, any bonuses any benefits in kind, the reclaim of expenses.

Now, it's not unusual for a director also to be a shareholder, but remember, we're talking about the distinction between the two roles, that sometimes one person can be both parties. Now, I want to now look at the liability and the risk. Now for a shareholder, the risk a shareholder will undertake is that any money they've invested, not lent, but they've invested by buying shares in the company,

that's the extent of their liability - anything that's not yet being paid for those shares their personal assets protected, and they're not responsible for any debts of the company beyond their initial investment. Now a director, there could be a legal risk they face if they haven't fulfilled their duties correctly. In some instances, there could be personal liability, for example, in cases of wrongful trading or where the director is given a personal guarantee for an overdraft facility, perhaps. Now we're coming to the tail end of this podcast.

Let's look at the last couple of things. Let's look at the appointment and removal. Now the only way to stop becoming a shareholder is by buying shares or having shares transferred or issued to you. Now, when you leave the company and you wish to no longer be a shareholder, then no shares can be transferred to a third party subject to the restriction in the articles.

They can't be sold on the public market, by the way, unless you happen to be a PLC. Now a director, typically the appointments are made by the shareholders. A lot of people in my experience will just appoint themselves or update Company's House records, question mark, but technically speaking there should be some porting documentation to reinforce that.

And directors can only be removed by a majority vote of the shareholders. Now, when it comes to involvement in the company, a shareholder on paper plays a passive role. Now it's not unusual for many small companies where the shareholder, and the director are one of the same. So that shareholder will wear a different hat, and when they are involved in the daily operations, the decision-making, growing the company,

et cetera, et cetera, then that is effectively their role as a director that's being discharged. If the company is slightly larger or more dispersed with shareholders, the access to information is limited to shareholders. And when I say limited to shareholders, shareholders don't necessarily have the right to full access to company documentation.

Officially, for a director, they have that active role in running the company, and they must keep shareholders informed about the company's performance. Typically that's discharged by the production of the annual accounts, any major changes that are proposed. So what's our summary conclusion? Well, shareholders are the actual owners of the company, and they are the ones who invest the money and have a say in any major decisions. But they're not technically speaking involved in everyday management. As I said, when it's a smaller company, a smaller business, shareholders and directors are one of the same people.

But when you're involved in the running of the company, you're acting in the capacity of a director, not as a shareholder. Now these distinctions and these differential between the shareholder and director outlines the key differences, but it can also have a massive impact when it comes to extracting funds from the company, a topic for another day.

Folks, I hope you found this useful. Let me know your thoughts, and until next time, keep moving forward. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.