What are the differences between limited company shareholders and directors?

Setting up your own limited company comes with greater roles and responsibilities to that of a sole trader. When registering your company, you are required to allocate a shareholder (or shareholders if preferred), and a company director.

Here, exclusively for ContractorUK, we breakdown exactly what the differences are between limited company shareholders and directors, writes Christian Hickmott, managing director of Integro Accounting. Let’s start with some working definitions.

What is a shareholder?

Firstly, remember that when forming your own limited company, you (the individual) are treated as a separate entity to that of the business. That means unless you allocate yourself shares for the business, you are not classed as a shareholder.

A shareholder – sometimes referred to as a ‘member’ -- holds shares invested in the business. They in principle own the business, and benefit from the growth of the company, ultimately acting as an ‘investor’.

As a shareholder their shares entitle them to a portion of the profits made through the business. These are paid via dividends dependent on the share value they hold.

What is the responsibility of a shareholder?

A shareholder normally has little to no control on the day-to-day running of the business. The responsibility of running the business lies with the company director. However the shareholder can attend meetings and discuss future ventures to benefit the business. When setting up your company as a contractor, the responsibilities of the shareholder could be stated from the offset, so it is clear as to the level of their involvement.

How many shareholders should a limited company have?

All limited companies are required to have at least one shareholder. But you can have as many as you would like. Anyone can be a shareholder, if they are over 16, have not declared bankruptcy, and have not been stricken off as a company director previously.

It is key however that at the start of setting up your business you state the name and quantity given per shareholder. The shares allocated state the percentage of ownership. 

What is a limited company director?

Every limited company is legally required to appoint a company director. The director oversees the running and day-to-day managing of the business. The director holds full accountability for the business and is often referred to as an ‘officer’ of the business (or ‘officers’ of the business if there are ‘directors’ i.e. more than one, single director).

Who can be the company director?

Usually for a one-person limited company, the individual setting up the business will appoint themselves as company director. However anyone can be appointed and, as above, this is only possible if they are over 16, have not declared bankruptcy, and have not been stricken off as a company director previously.

In some instances and as touched upon above, there can be more than one director, for example two spouses both acting as company directors for the business.

What are the full duties of a limited company director?

A comprehensive breakdown of what is required of you as a company director can be found in the Companies Act 2006 and the articles of association.

As a limited company director, you are legally required to manage all tax filing deadlines and reports. Within the above act, you are further required to act within the powers given, to promote the success of the company and make decisions for the overall goal and benefit to the business.

Generally speaking, act in good faith for the wellbeing of the company, and not for personal gain and you won’t go far wrong!

Can I be a shareholder and not a director?

The short answer is ‘yes’, and vice versa, but many businesses choose a different shareholder to the person who is company director. That said, many contractors will also appoint themselves as both shareholder and director! Typically, this involves one share with full accountability. This gives the contractor full control and insight of the entire business, not only running it but owning the company too.

Financially, this means they will also benefit as they will have the option to pay themselves through a combination of both salary (usually allocated to the company director) and dividends (usually allocated to the shareholder).

Company director versus company shareholder: conclusion

As a shareholder you own and benefit from the profits of the business, however, you have very little say on the day-to-day running. As a director you have full control on the day-to-day running of the business, the responsibility of the accounts, and tax requirements and payments. However you will not have the option to receive payments by dividends.

If in doubt over shareholders and directors...

Should you require further guidance to be shared on being a shareholder, or direction on being a director, we recommend speaking to your contractor accountant to offer advice tailored to your individual circumstances.