What is the Shareholder? Rights and Role in Private Limited Company
A shareholder is an individual, business, or group that buys stock in a company. Simply put, they are the company's owners to the extent that they have shares. Because they contribute the funds required for operations and expansion, shareholders are essential to a company's success.
Businesses sell shares to raise capital, and people or organizations purchase these shares to become shareholders. A portion of the company's income (if dividends are paid), ownership rights, and occasionally the ability to vote on corporate decisions are all received in exchange by shareholders. The role of Shareholders in any Private Limited Company is expressed in this blog post.
Types of Shareholders
There are two main types of shareholders:
1. Common Shareholders, or Equity Shareholders
The true proprietors of the business are its equity stockholders. They own equity shares, which entitle them to a portion of the company's income in the form of dividends and the ability to vote at general meetings. Dividends are not assured, though, and shareholders might not get any money back if the business loses money.
2. Preference Shareholders
Special privileges are granted to Preference Shareholders. Even in cases where the company's profits are low, they are paid fixed dividends ahead of equity owners. Preference shareholders typically cannot vote, still. If the business is liquidated (closed), they are given priority over equity shareholders.
Rights of Shareholders
Being a shareholder comes with several important rights. Some of the key rights include:
1. Voting Rights
Typically, equity owners can vote on crucial business decisions like choosing directors or authorizing acquisitions. An individual's voting power increases with the number of shares they hold.
2. Right to Dividends
When a business turns a profit, it can pay out dividends to its shareholders. Nevertheless, businesses are not required by law to distribute dividends, and some would rather put their profits back into the company.
3. Right to Ownership and Control
Shareholders are the company's owners. Even while individual shareholders might not have much power, those who possess a sizable portion of the company's shares can have an impact on corporate policies, business choices, and even leadership changes.
4. Right to Financial Information
The company's annual reports, balance sheets, and financial reports are all accessible to shareholders. They are better able to comprehend the business's performance and make wise investment choices as a result.
5. Right to Sell Shares
In the stock market, shareholders are free to sell their shares whenever they want. They can sell for more money and turn a profit if the company's worth rises.
6. Right to Attend Meetings
Annual General Meetings (AGMs) are a forum for shareholders to voice their concerns, ask questions, and cast votes on important issues.
Responsibilities of Shareholders
While shareholders enjoy many benefits, they also have responsibilities:
1. Risk of Financial Loss
Shareholders take on financial risks. If a company does well, share prices increase, and they benefit. However, if a company performs poorly, the share price may drop, and they could lose money. Investors assume monetary risks. Share prices rise when a business performs well, and they gain from this. However, a firm may lose money if its share price declines due to bad performance.
2. Compliance with Laws
Legal requirements must be followed by shareholders when purchasing, selling, or exchanging shares. Trading on the inside is banned by law and is defined as the use of proprietary corporate information for one's benefit.
3. Participation in Company Decisions
To help the business succeed in the long run, responsible shareholders participate in meetings and exercise their voting rights sensibly.
4. Long-Term Investment Approach
Instead of concentrating just on immediate profits, stockholders need to encourage the company's long-term expansion. Their individual investment and the business both gain from this.
How Do Shareholders Benefit?
Shareholders invest in companies to earn returns. There are several ways they benefit:
1. Capital Appreciation
The price of shares rises if the company's worth increases. A greater price allows shareholders to profit from the sale of their shares.
2. Dividends
As a regular source of revenue, companies frequently pay dividends to shareholders from a portion of their profits.
3. Decision-Making Power
Large shareholders, or major shareholders, have the power to shape plans, leadership, and important business choices.
4. Limited Liability
Limited liability is one of the main benefits of holding shares. As a result, shareholders are not held personally liable for the company's obligations in excess of their investment, even if the business fails.
Difference Between Shareholders and Stakeholders
Shareholders and stakeholders are frequently confused. Stakeholders are those who are impacted by a company's success or failure, even though shareholders own shares in the business. This includes the local community as well as workers, clients, and suppliers. Not every stakeholder is a shareholder, but every shareholder is a stakeholder.
Differences Between Shareholders and Directors
Ownership vs. Management – Directors supervise the company's operations, yet shareholders own it.
Role – Directors make corporate decisions and make sure the law is followed, while shareholders invest in the company.
Appointment – Directors are chosen by current board members or shareholders, whereas shareholders purchase shares or receive ownership.
Rights – Directors have decision-making power over day-to-day operations, while shareholders can vote on important choices.
Responsibilities – Managing business strategy, compliance, and governance are the responsibilities of directors, whereas shareholders concentrate on investment and profits.
Liability – Directors may be held personally responsible for financial or legal crimes, but shareholders' responsibility is limited at their investment.
Decision-Making – Directors make operational and strategic choices, while shareholders have an impact on important corporate policies.
Meetings – Shareholders attend Annual General Meetings (AGM), whereas directors participate in Board Meetings.
Profit Distribution – Dividends are given to shareholders based on profits, while directors are compensated with salaries or fees for their work.
Removal – While shareholders may sell their shares to leave, directors may be fired by shareholders or by the law.
Conclusion
Shareholders are essential to a company's success. They provide financial support, influence company decisions, and share in the risks and rewards. While investing in shares offers profit opportunities, it also involves risks, and shareholders must stay informed about the company's performance.
Whether you are an individual investor or a large institution, being a shareholder means being a part of the company's journey—experiencing both its challenges and successes. Connect with the Registration Guru platform and get your registration certificate.