Key Takeaways

  • A shareholder is anyone who owns company stock, whether an individual, institution, or another company.
  • Shareholders have rights such as voting on major decisions, inspecting records, and receiving dividends.
  • C-corporation shareholders face no restrictions on nationality or entity type, while S-corporation shareholders are limited to U.S. citizens/residents and certain trusts or estates.
  • Understanding how to become a shareholder often involves purchasing shares, meeting eligibility criteria, or being admitted under a shareholder agreement.
  • Minority shareholders have rights to fair treatment, access to company information, and legal remedies if their interests are oppressed.
  • Shareholder agreements outline rules for ownership, dispute resolution, buyouts, and restrictions on transferring shares.
  • Professional firms (such as law practices) may have additional admission criteria for new shareholders, including tenure, performance, and financial commitment.

Who can be a shareholder? Almost anyone can become a shareholder in a C-corporation. However, an S-corporation can only have U.S. citizens, U.S. residents, and certain trusts, LLCs, estates, and organizations as its shareholders.

Who Is a Shareholder?

Anyone who owns shares in a company is called a shareholder or a stockholder of the company. A shareholder can be a person, institution, or another company. Shareholders are the owners of a company. If the company does well, the shareholders benefit through appreciation in the value of their shares. However, if the company incurs losses, the shareholders can also be at a loss due to fall in stock prices.

Unlike in partnership and sole proprietorship businesses, shareholders aren't responsible for debts and obligations of the company. If the company cannot meet its debts, creditors cannot pursue personal assets of shareholders.

Shareholders do not directly manage the operations of a company. Instead, they appoint a board of directors to govern the business operations.

How to Become a Shareholder

Becoming a shareholder can happen in several ways. The most common is purchasing shares directly from a company during an offering or through a stock exchange if the company is public. In private companies, admission often requires approval under a shareholder agreement, which outlines who may hold shares, restrictions on transfers, and procedures for disputes.

In closely held businesses or professional firms, individuals may need to meet specific performance or tenure requirements before being offered shares. For example, law firms sometimes require associates to demonstrate profitability, leadership skills, and a long-term commitment before being admitted as shareholders.

Key steps to becoming a shareholder include:

  • Buying shares in public markets or through a private offering.
  • Receiving shares as part of compensation or succession planning.
  • Meeting eligibility requirements under company bylaws or agreements.
  • Complying with restrictions on transfer or ownership type, especially for S-corporations.

Rights of a Shareholder

Shareholders' rights are defined in the company's bylaws and corporate governance policy. Usually, a shareholder enjoys the following rights:

  • To inspect and approve company books and records
  • To seek legal remedy against misdeeds and negligence of directors and officers of the company
  • To vote on major business decisions, such as the election of directors and approval of proposed mergers or acquisitions
  • To have a share in the assets of the company in case of liquidation (after paying off creditors and bondholders)
  • To receive dividends on shares (whenever the company decides to distribute its earnings)
  • To attend annual company meetings
  • To vote via mail or by proxy if they can't attend a meeting in person

Protections for Minority Shareholders

Minority shareholders—those holding less than 50% of company stock—often lack control over company decisions but still enjoy important legal protections. These rights may include:

  • Access to financial information and records.
  • The right to dividends if declared by the board.
  • Protection against unfair prejudice or exclusion by majority shareholders.
  • The ability to challenge decisions that are oppressive, discriminatory, or fraudulent.

Courts and corporate statutes in many jurisdictions recognize the risk of abuse by majority shareholders. As a result, minority investors can bring legal action if they are treated unfairly, denied information, or excluded from their rightful role in the company.

Who Can Be a C-Corporation Shareholder?

The IRS classifies C-corporations as a distinct taxation entity different from their owners. A C-corporation can have its own name and issue different classes of shares, including general and preferred shares.

Shareholders of a C-corporation need not be citizens or residents of the United States. In fact, there is no restriction from the IRS on the type of entity that can own shares in a C-corporation.

Who Can Be a Shareholder in an S-Corporation?

According to tax law, the following persons can become shareholders in an S-corporation:

  • Citizens of the United States
  • Permanent U.S. residents
  • LLCs owned by a single member who is a citizen or resident of the United States
  • Certain S-corporation trusts
  • Certain voting trusts
  • Testamentary trusts that are created by a will
  • Grantor trusts
  • Revocable trusts that are created as part of an estate
  • Bankruptcy estates
  • Certain exempt organizations

First, you must be a U.S. citizen and permanent U.S. resident to become an S-corporation shareholder. The income of an S-corporation passes through the personal tax return of individual shareholders.

Second, certain trusts and single-member LLCs can own shares in an S-corporation, but they aren't involved from a taxation point of view.

Third, certain estates are allowed to become members of an S-corporation so that the company doesn't lose its S-corporation status merely because of a member's death or bankruptcy. For example, if an existing S-corporation shareholder dies and their shares go into an estate or a member becomes bankrupt and their shares go into a bankruptcy estate, the S-corporation status of the company remains intact.

Lastly, an S-corporation can own another S-corporation. For this, the subsidiary S-corporation must be a QSUB or a qualified subchapter S-corporation.

Who Can't Be an S-Corporation Shareholder?

By process of elimination, the following persons and entities can't become shareholders of an S corporation:

  • Nonresident aliens (individuals who are neither citizens of nor residents in the United States)
  • C-corporations
  • Partnership firms
  • Multi-member LLCs (the IRS treats them as general partnerships)
  • Limited liability partnerships
  • Foreign trusts
  • Individual retirement accounts

Moreover, an S-corporation can't have more than 100 shareholders. Thus, if an S-corporation already has 100 shareholders, everyone else automatically becomes ineligible to become shareholders. However, for the purpose of a 100-shareholder limit, all members of a family are treated as a single shareholder. Family members can include:

  • Common ancestors, such as grandparents
  • The following generation, like spouses and ex-spouses
  • Lineal descendants, such as grandkids

Role of Shareholder Agreements

A shareholder agreement is a key document that governs relationships among shareholders, especially in private companies. These agreements can:

  • Define who is eligible to own shares.
  • Establish rules for transferring or selling shares.
  • Provide buy-sell arrangements if a shareholder leaves or passes away.
  • Set voting rights and quorum requirements.
  • Include dispute resolution processes.

Such agreements help ensure clarity and fairness, reducing the likelihood of costly disputes among shareholders. They are especially valuable in small or family-owned corporations where ownership stakes are closely held.

Frequently Asked Questions

  1. How can I become a shareholder in a private company?
    Usually, you must be approved under a shareholder agreement, purchase shares directly from existing owners, or receive shares through succession or compensation.
  2. What is required to become a shareholder in a professional firm like a law practice?
    Admission criteria often include years of service, demonstrated profitability, leadership skills, and sometimes a financial buy-in.
  3. Do minority shareholders have legal protections?
    Yes. Minority shareholders can challenge unfair treatment, demand access to information, and in some cases seek legal remedies against oppressive conduct.
  4. Can anyone become an S-corporation shareholder?
    No. Only U.S. citizens, residents, and certain trusts or estates can hold S-corporation shares. Foreign investors and corporations are excluded.
  5. Why is a shareholder agreement important?
    It defines shareholder rights, ownership rules, and transfer restrictions, helping prevent disputes and protecting all parties.

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