What Is a Shareholder?
A shareholder is a person, company, or institution that owns at least one share of a company’s stock or in a mutual fund. Shareholders essentially own the company, which comes with certain rights and responsibilities. This type of ownership allows them to reap the benefits of a business’s success.
These rewards come as increased stock valuations or financial profits distributed as dividends. Conversely, when a company loses money, the share price invariably drops, which can cause shareholders to lose money or suffer declines in their portfolios.
KEY TAKEAWAYS
- A shareholder is any person, company, or institution that owns shares in a company’s stock.
- A company shareholder can hold as little as one share.
- Shareholders are subject to capital gains (or losses) and/or dividend payments as residual claimants on a firm’s profits.
- Shareholders also enjoy certain rights, such as voting at shareholder meetings to approve the board of directors members, dividend distributions, or mergers.
- In the case of bankruptcy, shareholders can lose up to their entire investment.
Understanding Shareholders
As noted above, a shareholder is an entity that owns one or more shares in a company’s stock or mutual fund. Being a shareholder (or a stockholder, as they’re also often called) comes with certain rights and responsibilities. Along with sharing in the overall financial success, a shareholder can vote on specific issues that affect the company or fund in which they hold shares.
A single shareholder who owns and controls more than 50% of a company’s outstanding shares is called a majority shareholder. In comparison, those who hold less than 50% of a company’s stock are classified as minority shareholders.
Most majority shareholders are company founders. In older, more established companies, majority shareholders are frequently related to company founders. In either case, these shareholders wield considerable power to influence critical operational decisions, including replacing board members and C-level executives like chief executive officers (CEOs) and other senior personnel when they control more than half of the voting interest. That’s why many companies often avoid having majority shareholders among their ranks.
Unlike the owners of sole proprietorships or partnerships, corporate shareholders are not personally liable for the company’s debts and other financial obligations. Therefore, if a company becomes insolvent, its creditors cannot target a shareholder’s assets.
IMPORTANT
Shareholders are entitled to collect excess proceeds after a company liquidates its assets. However, creditors, bondholders, and preferred stockholders have precedence over common stockholders, who may be left with nothing after all the debts are paid.
Special Considerations
There are a few things that people need to consider when it comes to being a shareholder. This includes the rights and responsibilities of a shareholder and the tax implications.
Shareholder Rights
According to a corporation’s charter and bylaws, shareholders traditionally enjoy the following rights:
- The right to inspect the company’s books and records
- The power to sue the corporation for the misdeeds of its directors and/or officers
- The right to vote on key corporate matters, such as naming board directors and deciding whether or not to green-light potential mergers
- The entitlement to receive dividends
- The right to attend annual meetings, either in person or via conference calls
- The right to vote on critical matters by proxy, either through mail-in ballots or online voting platforms if they’re unable to attend voting meetings in person
- The right to claim a proportionate allocation of proceeds if a company liquidates its assets1
Shareholders and the Internal Revenue Service (IRS)
It is important to note that if you are a shareholder, any gains you make as such should be reported as income (or losses) on your tax return. Keep in mind that this rule applies to shareholders of S corporations. These are typically small-size to midsize businesses that have fewer than 100 shareholders. The corporation’s structure is such that the income earned by the company may be passed to shareholders. This includes any other benefits, such as credits/deductions and losses.
According to the Internal Revenue Service (IRS), “Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.”2
This is opposed to shareholders of C corporations, who are subject to double taxation. Profits within this business structure are taxed at the corporate and personal levels for shareholders.3
FAST FACT
- It is a common myth that corporations are required to maximize shareholder value. This may be the goal of a firm’s management or directors, but it is not a legal duty.
Types of Shareholders
Many companies issue two types of stock: common and preferred. Common stock is more prevalent than preferred stock and is what ordinary investors typically buy in the stock market.
Generally, common stockholders enjoy voting rights, but preferred stockholders do not. However, preferred stockholders have a priority claim to dividends. Furthermore, the dividends paid to preferred stockholders are generally more significant than those paid to common stockholders.
What are the main types of shareholders?
A majority shareholder owns and controls over 50% of a company’s outstanding shares. This type of shareholder is often company founders or their descendants. Minority shareholders hold less than 50% of a company’s stock, even as little as one share.
What are some key shareholder rights?
Shareholders have the right to inspect the company’s books and records, the power to sue the corporation for the misdeeds of its directors and/or officers, and the right to vote on critical corporate matters, such as naming board directors. In addition, they have the right to decide whether or not to green-light potential mergers, the right to receive dividends, the right to attend annual meetings, the right to vote on crucial matters by proxy, and the right to claim a proportionate allocation of proceeds if a company liquidates its assets.
What is the difference between preferred and common shareholders?
The main difference between preferred and common shareholders is that the former typically has no voting rights, while the latter does. However, preferred shareholders have a priority claim to income, meaning they are paid dividends before common shareholders. Common shareholders are last in line regarding company assets, meaning they will be paid out after creditors, bondholders, and preferred shareholders.
The Bottom Line
Shareholders, or stockholders, are the owners of a company’s outstanding shares, representing a residual portion of the corporation’s assets and earnings and a percentage of the company’s voting power. Stockholders have a right to participate in the distribution of corporate assets in the form of dividends (if they are paid) and possibly through the sale of their holdings at a profit on the stock market. Individuals may become shareholders by buying common stock in corporations through brokers or directly from the company (if they offer a direct investment plan). In many countries, corporations may also offer employee stock options to benefit workers. If a company goes bankrupt, common shareholders are last in line to be repaid (behind creditors and preferred shareholders). Preferred shareholders hold preferred stock, often paying a high and steady dividend but without voting rights. Preferred shares are, therefore, sometimes thought of as a sort of debt-equity hybrid security.
- University of Notre Dame Law School, NDLScholarship. “The Fundamental Rights of the Shareholder,” Pages 413-424.
- Internal Revenue Service. “S Corporations.”
- Internal Revenue Service. “Forming a Corporation.”
