What is Shareholder?

A shareholder (also called a member) is a person or entity that owns shares in a limited company. Shares represent ownership of the company, and the proportion of shares you hold determines your voting power, your entitlement to dividends, and your share of the company's assets if it is wound up. In most small limited companies, the founder is the sole shareholder and also the sole director.

Shareholders have several key rights under the Companies Act 2006: the right to receive dividends when declared, the right to vote on company resolutions (such as appointing or removing directors, approving accounts, or changing the articles of association), the right to receive a copy of the annual accounts, and the right to a share of surplus assets on a winding up. The extent of these rights depends on the type and class of shares held.

Most small companies issue ordinary shares, which carry equal rights to voting, dividends, and capital. However, companies can create different share classes -- for example, 'A' ordinary and 'B' ordinary shares with different dividend rights. This is often used for tax planning where a director-shareholder's spouse or adult children hold a different share class, allowing dividends to be paid selectively to family members in lower tax bands. HMRC scrutinises these arrangements under the 'settlements' legislation and the 'Arctic Systems' case law.

It is important to understand that being a shareholder and being a director are separate roles. A shareholder owns the company; a director runs it. In practice, small company founders are usually both, but they do not have to be. You can be a shareholder without being a director, and vice versa. Each role carries different rights, responsibilities, and tax implications.

When a company is formed, the initial shareholders subscribe to shares as stated in the memorandum of association. The company issues share certificates confirming ownership. Shares can subsequently be transferred (sold or gifted) to other people, or new shares can be allotted (issued). All changes must be recorded in the register of members and notified to Companies House via the confirmation statement or specific forms (such as SH01 for new allotments).

Dividends are paid to shareholders from the company's distributable profits (accumulated retained earnings after tax). The company must hold a board meeting to declare an interim dividend or a general meeting for a final dividend. Each shareholder receives dividends in proportion to their shareholding, and a dividend voucher must be issued showing the date, amount, and tax credit. Shareholders report dividends on their Self Assessment return and pay dividend tax at their marginal rate.

Shareholders exercise control through resolutions. Ordinary resolutions (such as appointing directors) require a simple majority (more than 50%) of votes. Special resolutions (such as changing the articles or company name) require at least 75% of votes. A sole shareholder effectively has complete control over all decisions.