Member vs. Shareholder: Everything You Need to Know
Simply put, members are owners of limited liability companies (LLCs) and shareholders are owners of corporations, but there can be overlap between the two.3 min read
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:
- Membership date
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.
Shareholders have certain rights allotted to them when they purchase stock in a company. These rights include:
- Transferring a selling shares at will
- Attending and voting at general corporation meetings
- Possess copies of the articles of organization, statutory report, and memorandum of association
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.
If you need help with understanding member versus shareholder, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.