Key Takeaways

  • A “member” typically refers to an owner of an LLC, while a “shareholder” refers to an owner of a corporation.
  • Members may have management responsibilities in LLCs, whereas shareholders generally do not manage corporations.
  • Shareholders can have different types of ownership through common or preferred shares.
  • The term "owner" can refer to both members and shareholders, but their rights and obligations differ by entity type.
  • Shareholders are not always the legal "owners" in the governance sense—ownership is nuanced and limited to financial stakes.
  • Dividends are structured differently between LLCs and corporations.
  • Shareholders may vote on key matters, but legal control often rests with directors, not shareholders.

A member vs. shareholder depends on what type of company an owner is a part of. Simply put, members are owners of limited liability companies (LLCs) and shareholders are owners of corporations, but there can be overlap between the two.

What Is a Member?

When an individual's name is included in the formation documents for an LLC, they are considered a member of that business. If the business includes a register of members in their official documents, all of the names entered are members. Registers of members include details about these people like:

  • Name
  • Address
  • Membership date
  • Occupation

Membership registers also include any investors in the business, or anyone who owns shares.

If the company is a limited liability company, then the risk of liability for each member is equivalent to the amount they originally contributed to the business. This is called their capital contribution. Companies without limited liability protection leave it up to their members to cover any business debts out of their own pockets regardless of their capital contribution amounts.

Members of an LLC may or may not have a hand in managing the company. The business can either choose to be member-managed or manager-managed. A member-managed LLC has its daily operations handled by the members of the company. A manager-managed LLC has a hired or appointed manager to take care of such duties.

Members of a corporation do not manage the company, but they vote to appoint people to a board of directors. This board is then put in charge of managing the business.

How to Become a Member of a Company

Becoming the member of a company is fairly simple. Usually, a person simply must sign the company's operating agreement or memorandum of association document. Anyone who purchases shares in a company also becomes a member of that company, especially if their name is included in the depository record.

Some people become members of businesses through membership transfers. If a previous member wants to leave a business or sell their shares, they can do so through a transfer of ownership.

What Is a Shareholder?

Any person who owns shares in a private or public company is called a shareholder. This person doesn't become a shareholder until the shares are officially allotted to them, so those who are simply subscribers are not yet shareholders.

Shareholders are also sometimes called a company's owners because the profits of the company are shared with them.

Corporate shareholders do not take part in managing the daily operations of the company, but they do sometimes have voting rights. This depends on the type of shares they own. Some companies choose to offer different levels of stock to their investors. You can purchase a stock with voting rights or a stock for a passive shareholder.

Shareholders with voting rights will be included in votes for the corporation's board of directors. Passive shareholders are only involved in the company on a monetary level. They give a capital contribution and they benefit from dividends, but they do not get a say in company affairs.

A shareholder in a C corporation can be another business entity like an S corporation, LLC, or partnership.

Types of Shareholders

Shareholders may be categorized based on the type of shares they own and the level of influence they exert over the company. The two main categories are:

  • Common Shareholders:
    These individuals own common stock, giving them voting rights in corporate matters such as electing directors or approving major changes. Common shareholders typically receive dividends after preferred shareholders and are last in line during liquidation.
  • Preferred Shareholders:
    Preferred shareholders have priority in receiving dividends and assets in the event of liquidation but usually do not have voting rights. These shares are often considered less risky and offer more predictable returns.

Additionally, shareholders may be classified as majority or minority stakeholders based on their ownership percentage, which can influence their level of control over the company.

Shareholder Rights

Shareholders have certain rights allotted to them when they purchase stock in a company. These rights include:

  • Transferring a selling shares at will
  • Dividends
  • Attending and voting at general corporation meetings
  • Possess copies of the articles of organization, statutory report, and memorandum of association

Dividends

Shareholders are given dividends when the company they own stock in profits. Before dividends are distributed each year, there is a date set to record all of the company's shareholders current at that time. Only the shareholders whose names are included in the company register will receive dividends that year.

For example, if a shareholder is in the process of transferring their shares to another at the chosen date, the new shareholder will not receive dividends until the next year when they've officially been added to the register.

Dividend distributions in corporations are required to correlate with the shareholders capital investment amount. Other entity types, like LLCs, have a little more freedom with profit distribution. They can choose to give a member a great percentage of profit whose capital contribution was less than another member. This is sometimes done as repayment for certain managerial duties.

The Role of Shareholders in Corporate Governance

Although shareholders are often called owners of a corporation, their role in governance is quite specific and limited:

  • Voting Rights: Shareholders can vote on major decisions, such as mergers, bylaw amendments, or electing directors.
  • No Operational Control: Shareholders do not manage daily operations; this is the responsibility of directors and officers.
  • Legal Separation: The corporation is a separate legal entity. Shareholders cannot act on its behalf unless also serving as directors or officers.

In contrast, members of an LLC may have more operational control, especially in smaller or closely held companies where they play dual roles as both owners and managers.

Risks and Rewards of Being a Shareholder

Owning shares in a corporation offers both potential rewards and risks:

Rewards include:

  • Dividend income when the company distributes profits
  • Capital gains if the value of shares increases
  • Voting power (depending on the class of shares owned)

Risks include:

  • Market volatility and share devaluation
  • Potential loss of investment during company insolvency
  • Limited control over corporate decisions, especially for minority shareholders

It’s important to note that shareholders’ liability is typically limited to the amount they invested in the company. They are not personally responsible for corporate debts beyond their shareholdings.

Shareholder vs Owner: Legal and Functional Distinctions

The terms “shareholder” and “owner” are often used interchangeably, but they carry distinct meanings depending on the business structure:

  • In corporations, shareholders are owners of shares, but not necessarily legal “owners” of the corporation in a direct, operational sense. Legal ownership and decision-making authority often lie with the board of directors and officers. Shareholders' influence is largely exercised through voting rights at general meetings and their ability to elect directors.
  • In LLCs, members are both legal and beneficial owners. They typically have direct control (in a member-managed LLC) or appoint a manager (in a manager-managed LLC). The ownership structure here implies more direct involvement in day-to-day affairs.

Importantly, shareholders are not agents of the company, nor do they owe fiduciary duties to it, unlike directors. This means their power is limited primarily to governance via voting or shareholder resolutions.

Frequently Asked Questions

  1. Is a shareholder the same as an owner?
    Not exactly. A shareholder owns shares in a corporation, but legal ownership and control are typically vested in the corporation itself and its governing board.
  2. Can someone be both a member and a shareholder?
    Yes, particularly in hybrid entities or when an LLC issues shares or a shareholder invests in a company that is also structured as an LLC in certain jurisdictions.
  3. Who has more control—members or shareholders?
    Generally, members of an LLC have more direct control over business operations than shareholders of a corporation.
  4. Do shareholders get paid before members in profit distribution?
    Not necessarily. Shareholders receive dividends based on board declarations and share type. LLC members can structure distributions more flexibly in the operating agreement.
  5. Are shareholders responsible for company debts?
    No, shareholders have limited liability and are not personally responsible for corporate debts beyond their investment.

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