To set up a private company limited by shares, you must have at least one director and one shareholder. These are entirely separate roles with different rights and obligations. However, it is common for the same people to hold both positions simultaneously, particularly in smaller owner-managed companies.
This article explains whether directors must also be shareholders (or vice versa) and the main differences between these two crucial roles in a company limited by shares.
Directors do not have to hold shares in a limited company
There is no legal requirement for the directors of a limited company to also be shareholders. Similarly, a shareholder has no automatic legal right to be a director. Nevertheless, it’s common for at least one person in a company to hold both positions simultaneously.
In most companies, directors hold shares, whether they are founding members or have been appointed to run the business on behalf of the other shareholders.
But it would be highly unusual for every shareholder to be a director in companies with multiple investors or employee share schemes. It simply wouldn’t work in practice.
The only time that directors must be shareholders, or vice versa, is when the articles of association include a share qualification provision. This optional clause stipulates that a person is required to hold a specified number of shares to qualify for appointment as a director of the company.
There is no such provision in the default model articles, which most companies adopt as their governing document. However, many companies amend the model version or write bespoke articles to meet the business’s specific needs.
This is why directors and shareholders should familiarise themselves with their company’s articles of association. Many firms also have shareholders’ agreements in place, which may include additional rules or restrictions on holding shares.
The difference between company directors and shareholders
In the most basic sense, shareholders own a company, while directors manage the business on their behalf.
Shareholders exercise control through their voting rights and decisions reserved to the members, including the power to appoint or remove directors. Directors manage the company day to day and exercise most of its business powers.
They are often the same people, but not always.
For example, a company could have two founders who are both directors and shareholders, an outside investor who owns shares but is not a director, and a managing director who owns no shares at all.
Rights and obligations of shareholders
Shareholders are the members of a company limited by shares. They own all or part of the business by taking one or more shares in the company, usually in exchange for capital investment.
Shares provide certain rights to members, such as appointing and removing directors, voting on the outcome of certain company decisions, and receiving a portion of profits in the form of dividend payments.
Shareholders’ liability is generally limited to any amount unpaid on their shares. If the shares are fully paid, there is normally no further amount for the shareholder to contribute simply because the company becomes insolvent.
Rights and duties of company directors
Directors are legally responsible for overseeing a company’s day-to-day business and operations on behalf of its members.
At least one director of a private limited company must be a natural person, not another company.
Directors exercise the company’s powers, make routine and strategic business decisions, and ensure the company complies with its legal and regulatory requirements, such as:
- filing annual accounts and confirmation statements at Companies House
- preparing tax returns for HMRC and paying any taxes due on profits
- ensuring company information is kept up to date on the public register
- overseeing and, where required, approving the issue or transfer of company shares
- keeping accurate business and accounting records
The Companies Act 2006 and the articles of association set out directors’ duties and powers. The statutory duties in sections 171 to 177 are owed to the company itself.
Shareholders’ agreements and directors’ service agreements often include additional responsibilities.
Directors may face penalties or other consequences if they fail to uphold their legal duties. Typically, they are not personally liable for company debts or losses unless, for example, they breach their duties or provide a personal guarantee for the company’s obligations.