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The Difference Between a Director and a Shareholder

Shareholder or Director or Both?

Shareholders and directors have different roles in a company. The shareholders own the company through its shares and the directors (who are often appointed by the shareholders) manage the company on the shareholders behalf.

On the face of it, the distinction is relatively simple but it can cause confusion in small companies which are owned and managed by the same person/people. The confusion sometimes arises due to company law requiring some decisions to be made by the directors, others to be made by the shareholders and some to be made by both! In the case of the latter, Clients wonder why they have to sign two documents (say, a directors’ resolution and shareholders’ resolution) which appear to authorise the same item of business. The reason is that they are signing one as a shareholder and one as a director.

Some differences

Directors or officers:

  1. Manage the company and are subject to certain obligations under the Companies Act;

  2. May be held personally liable if they fail to comply with their legal obligations;

  3. Appointed by the shareholders who will also determine their duties;

  4. Not entitled to a share of the profits (unless provided for in their Employment/Services Contract) but may be paid a salary.

Shareholders or members:

  1. The owners of the company and entitled to receive a share of the profits through dividends;

  2. Not involved in the management or day to day business activities;

  3. Liability is limited to the nominal value of their shares;

  4. Can appoint/remove directors.

Conclusion

It is easy to see why confusion can arise if the directors are the same people as the shareholders. Each individual is, for example, responsible for managing the company as a director but has no such responsibility as a shareholder.

Contact Richard Jenkins on 07837 762705 or Richard@clariclegal.co.uk for further advice or assistance.

This should not be relied upon for legal advice.

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