What is a Shareholder in a Business (Definition, Roles, and Types Guide)

Ryan Patrick

Sep 21, 2024 • 7 min read

A company seeking additional capital may issue shares to raise capital from investors. When the investors invest in the company by purchasing shares, they become shareholders.

A shareholder's powers and rights are determined by the type of shares they own, the shareholder's agreement they signed, and the company constitution. This blog navigates the definition, roles, and shareholder types in a company in the UK.

Who is a Shareholder?

A shareholder is an individual or a part-owner of a company. They get company ownership through purchasing shares. Whenever any person or organisation invests, they purchase a fractional stake in the organisation concerning the number of shares purchased.

Stockholders or shareholders must own a minimum of one share of a company's stock or mutual funds to qualify as the company's partial owner. If the company does well and profits, shareholders are entitled to the declared dividends. They also have the right to vote on particular company affairs and can be elected as directors.

When a company is liquidated and sits are disposed of, the shareholders may receive a portion of that money as long as all debts are paid. In case the company enters into debt, the primary advantage of a stockholder is you're not obligated to pay those debts. This means creditors can't compel you to pay them.

Roles of a Shareholder

The Companies Act 2006 requires the shareholders to ratify business matters affecting their status at a general meeting called by the company's directors through a special resolution. Shareholders seem to have minimal influence as much as the directors and the management of the business firm are concerned. Their primary role is to attend meetings, take and record minutes, monitor that directors do not exceed their responsibilities, and, where necessary, provide consent.

Let's explore shareholder's rights:

1. General Meetings

General meetings include the attendance of the company shareholders. Directors can convene the general meeting whenever they want. Still, shareholders who hold at least 5% of the corporation's paid-up capital or voting rights may also demand a general meeting. The directors must call a meeting within 21 days of proper notice, or the shareholders can call the meeting.

Where the shareholders of a small company are not all directors, an annual meeting is an opportunity to consider accounts and discuss affairs with directors.

2. Annual General Meetings

Private limited companies do not legally need to hold annual general meetings unless provided for in their Articles. However, shareholders may demand one, or directors may call one. Large companies, in particular, need to hold an annual general meeting within six months of the company's accounting reference date as stipulated in section 336 of the Companies Act 2006.

3. Voting rights

Shareholders exercise their power by voting on various company policies and electing directors. Their voting power depends on the amount of stock they own. For instance, the shareholders of a company in the technology sector may resolve to improve the company's data privacy policy, which indicates the shareholders' ability to influence how a company is run.

4. A portion of company ownership

The shareholders are the partial owners of the company, and the extent of their ownership depends on the number of shares they own. This ownership gives them an authority or a voice in how the company has performed and where it is heading.

For instance, a shareholder with many shares in a retail business may push the company to expand its online presence, which could impact its operational strategies.

5. Rights to dividends

When a company makes profits, part of these profits may be paid out to the shareholders as dividends. Dividends are not compulsory, but when given, shareholders have a right to their shares.

6. Shareholders can transfer ownership.

As a company shareholder, you have the right to transfer ownership. This allows you to exit your investment, shift your financial interest, or liquidate your holding as you see fit.

For example, suppose a company shareholder wants to sell their stock. In that case, they can pass the ownership rights of those particular shares to another person. In turn, the buyer receives the corresponding legal obligations for such shares. The possibility to transfer ownership is one of the main characteristics of shareholder rights, providing liquidity and freedom in managing shares.

7. Obtain company information

Shareholders have a right to access company crucial information. They can obtain financial records and other company data to ensure they make informed investment decisions.

8. Shareholders can sue the company.

The shareholders can file an action against the company for any wrongful act that the company may have committed.

Types of Shareholders

Company shareholders can be categorised in the following ways:

Type of shareholders depending on ownership

Based on company ownership percentage, there are two types of shareholders

Majority shareholder: An individual who owns over 50% of company shares is a majority shareholder. They have a significant say in how the company will run. Usually, the company founders become majority shareholders. However, if another organisation acquires over 50% of the company shares, it becomes a majority shareholder.
Minority shareholder: The investor who does not have at least 50% of the total number of shares of the company is referred to as a minority investor. It is most familiar to most investors in the financial markets.

Type of shares, depending on the amount of shares you own

Common shareholders: these types of shareholders own the company's common stock. These people have the privilege to vote on company matters. Furthermore, they can also invoke these rights, for instance, by pursuing a class action against aspects that may adversely affect the organisation.

Preferred shareholders: these shareholders enjoy privileges over common shareholders during profit distribution. Although they have no voting rights, they receive fixed dividends even when the business' profitability is at risk.

Below is a table showing the difference between common and preferred shareholders.

Parameters	Common shareholders	Preferred shareholders
Dividend distribution	Common shareholders get dividends generated from the company's profit	In dividend payments, preferred shareholders have privileges over common shareholders since they are offered a fixed preference for divisors.
Profitability	Payout of dividends to the common shareholders largely depends on the company's performance. Ordinary shareholders experience a loss if the business reports losses, but they receive better dividends if they have strong performance.	No matter the company's performance, preferred shareholders receive dividends at a fixed rate since they are not determined by company performance.
Voting rights	They have voting powers concerning essential decisions of company operation.	They do not vote over company critical matters.
Procedure at the time of insolvency	Common shareholders carry higher liability if the company declares insolvency and can lose their entire investment.	They can claim company assets during insolvency.

Advantages and Disadvantages of Owning Shares

Several reasons may lead to investing in company shares, such as growing wealth over the long term and generating passive income through dividends. However, knowing the risks of share ownership is essential before purchasing these shares.

Let's explore the advantages and disadvantages of investing in shares:

Advantages of being a shareholder

Potential for Capital Gains: One of the benefits of a shareholder is that the share price may rise in value above the cost, thus leading to capital gains. However, such gains can be taxed when you sell the company's shares.
Ownership in the Company: Having shares in a company means that you have ownership and can make decisions that affect possible capital gains and dividends.
Dividend Income: Shareholders may enjoy dividends, portions of a company's earnings that qualified shareholders may be paid in cash or shares regularly, mostly quarterly. However, not all companies pay dividends, although some might do so even when the company is not profitable enough to afford to display goodwill.
Liquidity: Stocks are more liquid than other assets, such as bonds or properties. You can easily trade them in the market and quickly convert them into cash within a short time. Nevertheless, it is distinct that liquidity can differ from one share to another.
Diversification: Purchasing shares is an addition to the investment list that helps diversify risks and keep specific investments from collapsing.

Disadvantages of being a shareholder

Risk of Loss: Though stock investment gives an excellent chance to make money, the asset's value can fall immediately after its purchase. When you trade shares with lower prices than their initial price, you get a vacant value, meaning you will sell at a loss. Furthermore, stocks have no protection from the FDIC, so one may lose their investments in the stock together if the company that the investment stock belongs to goes bankrupt.
Volatility: As a shareholder, you must understand the fluctuations that occur in the market and the assets in which you invest. A highly 'volatile' stock can mean that the price of the stock is prone to observing significant and fast changes in the price, and therefore, it will be more risky.
Limited control: Since shareholders have percentage ownership in a business, they only have partial control and influence over the operations, direction, and stock price of the company. If you don't hold most of the company shares, you will have less influence over decision-making. If the company undertakes specific actions you disapprove of, your only available action is to dispose of your shares. Preferred shareholders have limited control over the common shareholders because they do not have the right to vote.
Fees and taxes: Fees and Taxes: As your investment increases, you might be tempted to sell some shares and convert them for cash. But remember, selling stocks comes with brokerage fees, capital gain taxes, and other charges that may lower your gains. You must be conscious of these factors and the time to sell, with references to the overall money management plan.

Shareholder vs. Stakeholder

Although people use shareholder and stakeholder terms interchangeably, they have different meanings. A shareholder owns a part of the company based on the number of shares they own. In contrast, a stakeholder is not part of the company but is interested in its performance. But this interest mustn't be beneficial.

Shareholders vs. Subscriber

Most companies start as limited companies before going public. Individuals who start the company are called subscribers. Since they are the company's first members, their names are in the memorandum of association. Their names remain in the public register even after the company goes public.

Incorporate Your Company with Incorpuk Today

At Incorpuk, we will help you file accurate information when you register your company through us. We will help you with incorporation articles, a registered office address, and all you may need to register your company in the UK. Contact our team if you seek any information; we will gladly assist.

Final Thought

Shareholders hold a vital role in the stock market. They influence the value of shares through their trading decision, allowing businesses to raise capital to meet their objectives and participate in significant company decisions while growing their wealth. However, you must weigh the risks of becoming a shareholder before investing. The risks include potential losses, limited control, and market volatility. Do you have any question about shareholder of a business? Kindly contact one of our experts here.