What Does It Mean to Be a Shareholder?
A shareholder is an individual, a company, or an institution that owns at least one share of a company’s stock or a share in a mutual fund. Owning shares essentially makes shareholders partial owners of the company, bringing both benefits and responsibilities.
These benefits include increases in stock valuations and financial profits distributed as dividends. Conversely, shareholders face potential risks: when a company loses money, share prices typically fall, affecting the shareholder’s investment value.
Key Takeaways
- A shareholder owns shares in a company’s stock.
- Shareholders can possess as little as one share.
- Capital gains (or losses) are realized when shareholders sell their shares; dividends may also be distributed if the company decides to pay them.
- Shareholders enjoy rights such as voting at shareholder meetings to approve board directors, dividend distributions, and mergers.
- In the event of bankruptcy, shareholders can lose their entire investment.
Grasping the Concept of Shareholders
A shareholder, or stockholder, owns one or more shares in a company’s stock or mutual fund, and with that ownership comes important rights and responsibilities. Shareholders can vote on significant matters affecting the company, participate in shareholder meetings, and potentially influence the company’s strategic direction.
A majority shareholder, who owns more than 50% of a company’s outstanding shares, exerts significant influence over the company’s operational decisions. Minority shareholders, owning less than 50% of the company’s stock, generally hold less control.
Corporate shareholders are shielded from personal liability regarding the company’s debts. In the case of insolvency, creditors cannot target shareholders’ personal assets. After a company liquidates its assets, shareholders are entitled to any residual proceeds, though all debts to creditors, bondholders, and preferred stockholders must be settled first.
Special Considerations for Shareholders
Shareholder Rights
As per a corporation’s charter and bylaws, shareholders traditionally enjoy rights such as:
- The right to inspect the company’s books and records
- The power to sue the corporation for misdeeds by directors or officers
- The right to vote on critical corporate matters, naming board directors, and approving mergers
- The entitlement to receive dividends if declared
- The right to attend annual meetings in person or virtually
- The ability to vote by proxy
- The right to claim a proportional share of proceeds if the company liquidates
Interactions with the IRS for Shareholders
Shareholders must report any gains or losses from the sale of shares on their personal income tax returns. Any dividends received are also taxable income. Additionally, different corporation types, like S Corporations, can have varying tax implications including pass-through taxation for income and losses, contrasting the double taxation exposure of C Corporations.
Types of Shareholders
Many companies issue two types of stock: common and preferred.
- Common Stockholders: Typically have voting rights and receive variable dividends based on the company’s performance. They are last in line to be paid in case of liquidation.
- Preferred Stockholders: Usually do not have voting rights but get priority over common stockholders for dividend payments, which are fixed and regular. They have a higher claim on assets than common stockholders in liquidation scenarios.
Frequently Asked Questions
What are the main types of shareholders?
Shareholders are primarily classified into majority and minority shareholders based on their shareholding percentage. Majority shareholders control more than 50% of the company’s stock, commonly founders or their relatives, while minority shareholders hold less than 50%, potentially as minimal as one share.
What are some key shareholder rights?
Key rights include inspecting the company’s records, suing for misdeeds, voting on major corporate matters like board elections and mergers, receiving dividends, attending annual meetings, voting by proxy, and claiming proceeds upon asset liquidation.
What is the difference between preferred and common shareholders?
Preferred shareholders have no voting rights but enjoy priority dividend payouts. Common shareholders, in contrast, have voting rights but are last to receive payouts in liquidation scenarios.
Conclusion
Shareholders are the lifeblood behind a corporation’s ownership structure, enjoying a portion of the corporation’s profits and assets through stock ownership and holding key governance roles via voting rights. They are vital participants in both the potential financial upsides and the risks linked with corporate performance.
Related Terms: stocks, mutual funds, voting rights, majority shareholder, minority shareholder.
References
- Notre Dame Law School, NDLScholarship. “The Fundamental Rights of the Shareholder”. Pages 413-424.
- Internal Revenue Service. “Topic No. 409, Capital Gains and Losses”.
- Internal Revenue Service. “Topic No. 404, Dividends”.
- Internal Revenue Service. “S Corporations”.
- Cornell Law School Legal Information Institute. “C Corporation”.
