What’s the difference between shareholders and directors?
Shareholders are essentially the owners of a company, while the directors are a person or group who make and approve high-level decisions on the company's behalf.
What is a shareholder?
Ashareholder, also known as a stockholder or member, can be a person, business entity, or organization. In the case of multi-million dollar corporations, the top shareholders are often other corporations.
Because shares are units of ownership in a company
, a party becomes a shareholder by purchasing shares
and meeting a company's Shareholder Agreement
requirements. The more shares they own, the greater the percentage of the company they own.
Having shares is valuable for a company because it encourages individuals and organizations to invest in a company without needing to make them a partner or put them on the payroll. From the shareholder's perspective, buying shares comes with the benefit of limited liability, meaning the company's debt isn't passed onto them. The only real financial risk comes from the shares losing their value and, therefore, the shareholder losing their investment.
What is a director?
Some corporations have thousands of shareholders. However, it isn't realistic for each of them to attend every meeting and make decisions. That's where directors come in. Shareholders elect directors to run the company with their best interests in mind.
The directors make business and financial decisions on the shareholders’ behalves and hire the managers and corporate officers that'll run the day-to-day operations.
If the shareholders aren't happy with the job a director is doing, they can also remove a person from that role. It's important to note that a director can be a shareholder in the company as well.
Some corporations have three types of directors:
- Chairperson: This person is the head of the board of directors and is in contact with the company president. They also often make sure director meetings run smoothly.
- Inside directors: These people are usually also shareholders, officers, or upper management within the corporation.
- Independent directors: These people generally don't hold another role within the company other than a director.