“Shareholder” and “director” are terms thrown around boardrooms all the time and can be very confusing to someone who doesn’t know what they mean. Even if you do understand the terms, you might be unsure as to where a shareholder or director fit within the corporation.
In this post, we’ll discuss what each party is in a corporation and how their roles differ within a company’s structure.
What is a Shareholder in a Corporation?
A shareholder, sometimes called a stockholder, is a person or a group of people that contribute funds to a corporation and thus own a portion—or share—of that company. They can own a small or large portion of the business, depending on the how many shares they bought from the company to become a shareholder.
It’s important to note that a shareholder can be a director in the company as well.
What is a Director in a Corporation?
A director is a person who assists in controlling the corporation. Oftentimes, a corporation has more than one director, known as the board of directors.
A corporation can also have one sole director. For example, a person may own a flooring installation business and decide to incorporate for liability protection purposes. In this instance, the owner of the business would likely name themselves as the sole director.
A director of a corporation can be anyone who is:
- Over the age 16
- Not filing for or undischarged from bankruptcy
- Not acting as an auditor for the corporation
Some corporations have three types of directors:
- A chairperson: This person generally leads the corporation and is in contact with the company president; they often make sure director meetings run smoothly.
- Inside directors: Inside directors are usually also shareholders, officers, or some other type of upper-management within the corporation.
- Outside directors: Outside directors generally do not hold another role within the company other than director.
A director has a high degree of responsibility to the company and is required to act in the company’s best interest. Directors perform tasks such as making key financial decisions, maintaining business relationships, considering consequences, electing officers (i.e. the president, treasurer, and secretary), and more.
What is the Difference Between a Shareholder and a Director?
There are many differences between a shareholder and a director of a corporation. Some differences include:
- Shareholders are paid dividends, if applicable (a portion of the company’s profits based on the number of shares the shareholder owns).
- Shareholders elect directors, and directors elect officers.
- Shareholders, for the most part, are not involved in making decisions for the company, except for some vital changes or dealings. For example, shareholders might make important decisions regarding a potential merger with another company or how stocks are issued in the company.
- Shareholders own shares within the corporation, which can be voting, non-voting, or preferred. Their shares and the type of share (voting, non-voting, or preferred) determine how much of the company they own and if they can vote on fundamental aspects of the corporation.
There are a few similarities between these roles as well, for instance:
- A shareholder and a director both use a corporate resolution to certify an action or decision, such as electing directors or officers (the documents are typically called a Shareholders’ Consent to Action Without Meeting and a Directors’ Resolution).
- One person can hold multiple roles in the company (a shareholder, director, and officer) all at the same time.
- A shareholder and a director should be a responsible, diligent, and business-oriented person.
Assigning Directors and Shareholders for Your Corporation
Whether you’re incorporating a business, taking on a new position as a director or a shareholder in a corporation, or simply want to know more about the various roles in a company, there are many reasons why it is helpful for you to know about how corporations are structured.
Corporate structure is complex and can be difficult to understand, but reviewing the basics, such as what a shareholder and a director are and how these roles differ, is a good start to understanding the vast corporate framework.
Do you know any more differences between a shareholder and a director? Let us know in the comments.