What is a Shareholder?

A shareholder refers to an individual who owns a minimum of one share in a company’s stock.

In theory it’s possible for any individual, company or organisation to become a shareholder in a company.

Shareholders are typically invested in either a private limited company or a public limited company also known as a PLC.

Investors often purchase shares in a public trading company (found on stock exchanges) to become a shareholder who then has the opportunity to benefit financially if the company performs well.

Owners of shares in a private limited company are commonly directors as well as shareholders who receive dividend payments from the company as an income.

Shares are the units of ownership a shareholder receives for their investment.

There are generally two share types called common shares and preferred shares with each having distinct rights and privileges as outlined in their contractual agreement with the company.

The meaning of being a shareholder

The meaning of being a shareholder will vary depending on your intention and financial goals.

What it means to be a shareholder depends on factors like the type of company you have invested in and if you are a director of the company at the same time.

A majority shareholder refers to a single shareholder who owns and exercises control over more than 50% of the outstanding shares of a company.

Individuals who hold less than 50% of a company’s stock are known as minority shareholders.

Importantly being a shareholder means that you are typically entitled to receive a portion of the company’s profits in the form of dividends which are distributed based on the company’s specific dividend schedule.

Owning shares in a company can give you the option to participate in some decision making processes during shareholder meetings.

From a legal perspective being a shareholder usually means that you will not bear personal responsibility for the debts of the company if any unfortunate circumstances arise.

Dividends and shareholders

Dividends refer to the payments made by corporations to their shareholders, which come from the profits or retained earnings which are approved by the board of directors.

When a company earns a profit it has the option to either reinvest it back into the business or distribute it to the shareholders as dividends.

The calculation of dividends takes into account the current year’s profits and the retained earnings from previous years.

Dividends for shareholders in a public limited company:

Corporations are not obligated to pay dividends from their capital but when they do dividends are normally paid as cash.

The amount of dividends a shareholder can receive is determined by the number of shares held and the monetary value of the shares.

Dividends for shareholders in a limited company:

As a limited company shareholder and director you have the option to receive your income through either PAYE (salary) or company dividends which can only be paid from current and previous tax years profits.

For company directors it can be advantageous to take money out of the company by using a combination of both dividends and PAYE salary.

Opting for a lower salary and higher dividends is typically the most tax efficient approach for several tax based reasons.

What is a shareholder in a public limited company?

A public limited company is a corporation in which the shareholders hold a stake in the company’s assets and earnings.

Ownership of a public company is divided among shareholders from the general public through the trading of shares on stock exchanges or over the counter (OTC) markets.

Individuals who become shareholders by investing in companies in this way are generally looking for dividend income or an increase in the value of the shares in the future (or ideally both).

Becoming a shareholder to make money by buying and selling shares can be done using various investing strategies and it should always be remembered that in the event of bankruptcy shareholders may face the risk of losing their entire investment.

What is a shareholder of a limited company?

A private company limited by shares can have either a single shareholder or multiple shareholders with each shareholder being entitled to receive a share of the profits based on the quantity and value of their shares.

A company that operates with shares must have a minimum of one shareholder who can also be a company director.

Setting up a limited company is common choice for business owners who want to be both a shareholder and a director who manages the company at the same time as owning it.

If you choose to be the sole shareholder you will possess 100% ownership of the company (majority shareholder) and if you are the only director you will also have complete control over the running of the business.

Choosing to set up a limited company and becoming a shareholder of your own company is sometimes done because it can have tax advantages in comparison to other business models.

What is an ordinary shareholder?

Ordinary shares commonly referred to as common shares are shares in a company that grant shareholders the ability to vote during company meetings and receive dividends as a share of the company’s profits.

The value of ordinary shares held by a shareholder directly correlates to their percentage of ownership in the company.

Investors and ordinary shares:

Ordinary shares are what’s normally offered on the stock market with the aim of raising funds for the company.

In the event that the company intends to issue additional shares in the future existing shareholders are granted the opportunity to buy the already issued shares in proportion to their current ownership through a rights issue.

Limited company directors and ordinary shares:

Many limited companies issue “ordinary” shares which grant directors one voting right for each share and entitle them to receive dividend payments.

A company that is limited by shares must have at least one shareholder and there is no limit to the number of shareholders allowed.

The value of an individual share can be set at any amount but in the event of the company’s closure shareholders will be required to pay the full price for their shares.

What is a preference shareholder

Preference shares are typically shares that hold a higher position in terms of dividends or capital compared to other shares, but they have limited voting rights.

Preference shareholders are given priority when it comes to receiving dividends, regardless of whether the company is in operation or is liquidated in the future.

Preference shareholders mainly receive a predetermined percentage of dividends on a monthly, quarterly, or annual basis which is agreed at the time of issuing the share certificates.

This is in contrast to ordinary shareholders who often receive fluctuating dividends each year.

Does a shareholder pay dividend tax?

Shareholders will be liable to pay dividend tax if they receive dividend income over the dividend allowance.

A shareholder that sells shares for a profit will potentially have to pay capital gains tax which is different to dividend tax.

Everyone receives a dividend allowance which allows you to earn £500 worth of dividend income tax free.

Dividend income below the dividend tax free allowance will not be subject to tax and doesn’t need to be declared to HMRC.

The rate of tax paid on dividends above the threshold depends on the tax band or bands your other taxable income falls into:

• Basic rate taxpayers pay 8.75% tax on dividends.
• Higher rate taxpayers pay 33.75% tax on dividends.
• Additional rate taxpayers pay 39.35% tax on dividends.

Do shareholders pay capital gains tax?

You might be liable to pay capital gains tax if you generate a profit (‘gain’) by selling (or ‘disposing of’) your shares. If you sell your shares at a profit, you may be required to pay capital gains tax (CGT) on them.

How much capital gains tax a shareholder owes depends on the rate of income tax you pay on your other taxable income.

In general individuals who fall into the basic rate tax bracket are subject to a 10% CGT charge, while those in the higher rate tax bracket(s) must pay 20%.

You will only be required to pay tax if your profit from selling shares goes over the capital gains tax allowance which is worth £3,000 per person.

In the case of being part of a couple both of your CGT allowances can be used for your benefit. It is possible to hold assets jointly and transfer them to your spouse or civil partner which let’s you use  both CGT allowances against the profit made from shares.