What is a shareholder?

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What is a shareholder?

A shareholder is a person (or company) that owns part of a limited company. When a company is incorporated, it issues shares. If you own one or more shares, you’re a shareholder.

Shareholders own a piece of a company and have a vested interest in its success, even if they never set foot in the office. In other words, they have a stake in the company and the value of their shares can go up and down depending on how the business is doing.

If it’s a public limited company, the shares will be listed on the stock exchange and anyone can buy or sell them.

If it’s a private limited company, the shares are usually allocated to the directors or divided between a group of shareholders.

There are several types of shareholders

Say the word ‘shareholders’ and it’s easy to conjure up the image of cigar-smoking billionaires grumbling over opening prices. But the reality is a lot more nuanced. These are the different types of shareholder:

A shareholder with ordinary shares

These include full rights to annual dividend payments (basically, a cut of the profits once a year), and a vote at meetings. They also get a share of any money left over if the company goes bust, though they’re last in the queue for that.

A shareholder with non-voting ordinary shares

Basically, the same rights as ordinary shareholders but (you guessed) without the vote.

A shareholder with preference shares

These shareholders have full rights to dividends but no voice in meetings. The upside is that they’re ahead of ordinary shareholders in the queue for dividends or any money left over if the company goes under. If the company can’t pay a dividend one year, shareholders with ‘cumulative preference’ shares will still get that money when dividends start up again.

A shareholder with redeemable shares

The company can buy these shares back, either on a set date or when the directors choose. Often this happens when an employee leaves the company.

A shareholder with alphabet shares

Alphabet shares are useful if you want to pay dividends at different rates or give different groups of shareholders different rights. Let’s say you’re the company founder and you want to make more people shareholders but make sure the directors still have more rights. Alphabet shares let you do this. But make sure you’re clear about your share structure in your company’s articles of association, so everyone knows what rights come with each type of share.

What shareholders can (and can’t) do

Shareholders usually have a say in company decisions – up to a point. How much say depends on the number and type of shares they own. For instance, they might be able to weigh in on important company decisions and put their hands up in meetings, but they won’t take an active role in running the business unless they’re also a director.

If you’re wondering what’s in it for shareholders, there’s always the matter of money. And there are a few ways for them to make it.

  • They get annual dividends

    In return for owning a share in the company, shareholders might also get a share of the profits in the form of a dividend payment.

  • They can sell their shares for a profit

    If the company is growing and the share price is on the up, shareholders might choose to cash in and sell their shares for a profit.

The benefit of shareholders

There are many things shareholders can offer a limited company. The most obvious is capital – investment in exchange for a stake. In some cases, shareholders can also offer experience and guidance to help move the company forward in the early stages.

Other names for shareholders

You might hear shareholders called members. Cooperatives often use this term to describe shareholders who have a say in the business. It’s also common for people to talk about ‘stakeholders’, although this isn’t the same thing as a shareholder. A stakeholder is a catch-all way of describing anyone who has a ‘stake’ in the company (even down to suppliers) and doesn’t necessarily mean they own shares.

How to issue shares

To form a limited company, you must name at least one shareholder and decide on the number of shares, their value and how you want to allocate them. Just like slicing a birthday cake, you can divide the company into as many shares as you like and pass them around, or leave them with one person.

At this point, the person setting up the company needs to send over information about the shares to Companies House. This is called a statement of capital and includes some basic information:

  • The company’s share capital

    This means the number and type of shares that make up the company. There are no hard and fast rules here – it’s up to the person setting up the company.

  • Names and addresses of shareholders

    The names and addresses of all shareholders, also known as members. There must be at least one name on the list, but there’s no maximum number of shareholders.

They’ll also need to keep Companies House in the loop if there are any changes to this outside of the confirmation statement. This is basically a document to keep Companies House up to date with the company’s directors, shareholders and registered office address at the end of each year.

In a nutshell

A shareholder is a person (or company) that owns shares in a limited company. If you’re about to register a limited company, you’ll need to name at least one shareholder and decide how many shares you want to issue. Remember, if you’re a small business, this can be you – the director and shareholder all rolled into one.

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