Directors and shareholders often play distinct and separate roles within a company. While both have significant roles in the operation of a company, their rights, responsibilities and liabilities differ greatly.
The legal separation between shareholders and directors can often lead to confusion within privately held companies.
Whilst the roles of shareholders and directors are completely separate, it is common for one person to hold both positions. This means that one person would have total authority and complete ownership of the company.
Shareholders
Shareholders, who are also referred to as members, can be a person or a corporate body, who exercise ownership by holding shares.
When a person invests in a company, they become a shareholder and are entitled to a portion of the company’s profits and assets depending on the number, class and value of the shares held. A person can own some or all of a company’s shares.
Shareholders are not involved with the day-to-day management of the company, unless they are also a director themselves.
Members have the right to vote and make decisions about important company decisions, such as appointing and removing directors, approving company policies and changing the company name.
Directors
A director is a person or corporate body, who is appointed by shareholders to run and manage the company’s affairs on their behalf and are accountable to the shareholders for their actions.
Executive directors have a legal duty to act in the best interests of the company, and they have the power to make decisions about the company’s operations, finances and strategy.
Directors have specific responsibilities and must execute a set of seven duties under the Companies Act 2006.
A director also has legal liabilities, which means they can be held personally liable for any wrongful acts committed by the company or if they fail to uphold their duties.
Directors are responsible for delivering annual accounts and ensuring company taxes are paid on time.
There are also non-executive directors. Non-executive directors are members of the company’s board who do not hold executive office and instead act as independent advisors. They do not handle the daily operations of the company.
However, non-executive directors still face the same legal responsibilities as executive directors and are involved in the planning of the company’s policies.
Key Differences
The biggest difference between a director and a shareholder is their role in the company’s management.
Shareholders invest in the company financially and have a say in its major decisions, but they do not manage the company’s day-to-day operations.
Whereas directors are responsible for running the company and making decisions that affect its daily operations.
Another key difference is their legal liability.
Shareholders are not personally liable for the company’s legal issues or debts.
Directors, on the other hand, have a legal duty to act in the best interests of the company and can be held personally liable if they breach their duties.
Understanding the difference between directors and shareholders is crucial for anyone looking to invest in or run a UK company. While both have important roles, their responsibilities and rights differ significantly.
If you would like more detailed advice on becoming a shareholder or a company director, get in touch today.