Shareholder

What Is a Shareholder?

A shareholder, also referred to as a stockholder, is a person, company, or institution that owns at least one share of a company's stock, known as equity. Because shareholders essentially own the company, they reap the benefits of a business's success. These rewards come in the form of 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 members of the board of directors, dividend distributions, or mergers.
  • In the case of bankruptcy, shareholders can lose up to their entire investment.
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Shareholder

Understanding Shareholders

A single shareholder who owns and controls more than 50% of a company's outstanding shares is a majority shareholder. In comparison, those who hold less than 50% of a company's stock are classified as minority shareholders.

In many cases, majority shareholders are company founders, and in older companies, majority shareholders are frequently descendants of company founders. In either case, by controlling more than half of a company's voting interest, majority 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. For this reason, companies often attempt to avoid having majority shareholders amongst their ranks.

Furthermore, 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 personal assets.

Shareholders are entitled to collect proceeds left over 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.

The Rights of Shareholders

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 greenlight 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 assets 

IRS and Shareholders

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 personal tax return. 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 the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level."

It is a common myth that corporations are required to maximize shareholder value. While this may be the goal of a firm's management or directors, it is not a legal duty.

Common vs. Preferred Shareholders

Many companies issue two types of stock: common and preferred. Common stock is more prevalent than preferred stock. Generally, common stockholders enjoy voting rights, while 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 who owns and controls more than 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 greenlight 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's 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, which means they will be paid out after creditors, bondholders, and preferred shareholders.

Article Sources

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  1. Internal Revenue Service. "S Corporations."

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