Understanding the differences between a director and a shareholder is very important if you are running a limited company.
A shareholder is someone who owns shares in a company and with those shares (assuming ordinary shares) has a right to income, to vote and to a share of the sales value of the company in the event of the company being sold.
The shareholders of a company appoint the directors to run the company on their behalf.
On the other hand, directors are officers of the company and should be managing the company on a day-to-day basis, making the decisions for the benefit of the shareholders.
The Companies Act 2006 outlines the duties of directors. It includes some general duties of directors which are:
- to act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were intended
- to promote the success of the company for the benefit of its shareholders
- to exercise independent judgement
- to exercise reasonable care, skill and diligence
- to avoid conflicts of interest
- not to accept benefits from third parties
- to declare an interest in a proposed transaction or arrangement
It is also the directors who are responsible for meeting all the filing deadlines with Companies House and HMRC. These responsibilities include filing the annual returns (now known as confirmation statements) and accounts and ensuring they are running the company according to UK Company Law.
All appropriate documents should be filed in a timely manner with Companies House and HMRC. Directors often engage an accountant to prepare these documents.
The directors can, in some instances, find themselves personally liable for debts they accrue in the company name – for example, if at the time the debts were amassed the company was considered insolvent – this is known as wrongful trading.
Directors are sometimes asked to give personal guarantees for business loans – be very careful with this as you could be on the hook personally for a business debt – generally we would advise to avoid personal guarantees, but this is something to discuss with a solicitor.
As well as the director’s responsibilities, some key decisions have to be made by the shareholders at a General Meeting or by resolutions – but most decisions required for the day-to-day running of the company will be made by the directors.
Dividends are normally paid to shareholders, and salaries are potentially paid to directors. For many small businesses in the UK the same individual is both a director and a shareholder. In this instance they will often receive both a salary and dividends, often in the most tax-efficient manner to suit their circumstances.