What Does it Mean to Be a Shareholder
What does it mean to be a shareholder? Basically, if you are a shareholder, it means you own stock in a corporation.3 min read
What does it mean to be a shareholder? Basically, if you are a shareholder, it means you own stock in a corporation. Owning corporate stocks gives you certain rights, including the right to attend annual shareholders meetings and cast votes.
What Are Shareholders and Stockholders?
Corporations are distinct from other business entities in several ways, including the fact that they have shareholders. A shareholder is someone who buys stock in a corporation and becomes a partial owner of the company. Shareholders purchase corporate shares in the hopes that their value will grow as the company expands.
The terms stockholders and shareholders can be used interchangeably. Corporate shareholders can come in many forms:
- Other institutions.
Shares of a corporation are sold at a specific price. If you are a shareholder, it means you hold an ownership stake in a corporation. You will share ownership with the other shareholders, and your influence over the corporation will depend on how many shares you have purchased.
When a stockholder purchases shares in a company, they can benefit in two important ways:
- Receiving dividends from the shares and a portion of the company's profits.
- Waiting until their shares have grown in value and then selling them for a profit.
Another benefit of being a shareholder in a corporation is that you won't hold any liability for the debts of the company. This makes corporations different from partnerships and sole proprietorships, where company owners can be held liable for their business's debts and obligations.
There are certain circumstances, however, where the courts can hold shareholders liable. This practice is commonly referred to as piercing the corporate veil. If a court finds that the corporation's shareholders have committed fraud or some other form of misconduct, the corporate veil may be pierced.
Creditors are unable to seek payment from corporate shareholders if the company is no longer solvent. Shareholders are a corporation's owners. They do not, however, actively participate in the management of the company. Instead of managing the companies themselves, shareholders appoint a board of directors that is responsible for overseeing the day-to-day operations of the corporation.
To provide proof of stock ownership, shareholders will be given a stock certificate. Generally, your stock certificate will be stored electronically with your brokerage firm.
Rights of Shareholders
When you purchase shares in a company, you will receive a variety of rights. These rights are defined and described in the bylaws of a corporation, as well as in its charter. The rights of a shareholder can differ from company to company. For instance, if you are a shareholder in a privately-owned corporation, your rights will be very different from those of a publicly traded company's shareholders.
Some of the basic rights afforded to corporate shareholders include:
- The right to examine company records.
- The right to file a lawsuit against the company for the misconduct of officers and directors.
- The right to vote on major corporate decisions. This includes appointing the board of directors and approving a merger.
- The right to be allocated a portion of liquidated company assets.
Every company will need to define the rights of its shareholders in a governing document such as the Articles of Incorporation. In Delaware, there are certain rules that apply if a company has not defined shareholders rights in its governing document. For example, one of the rights granted to corporate shareholders in Delaware is the right to pro-rata dividend shares. Another Delaware shareholder's right is that one share equals one vote when deciding company matters.
Public Company Shareholders vs. Private Company Shareholders
Shares of small corporations are usually not sold publicly. Instead, these corporations are closely held, meaning they have a small group of shareholders. Typically, the shareholders in a closely held corporation have a pre-existing relationship, and in many cases are members of the same family. Publicly held corporations are very different in that they often have gigantic groups of shareholders that can easily number in the millions.
In a closely held corporation, the shareholders may be more involved in the operation of the company. On the other hand, in publicly held corporations, shareholders will only participate in the running of the company by casting votes during the required annual shareholders meeting. Another big difference between these two types of companies is that public corporations are subject to oversight by the Securities and Exchange Commission (SEC).
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