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Directors and shareholders: differences, duties and powers

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    James Martini

    James Martini UKBF Ace Staff Member

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    According to the most recent business population estimate released in October, there are 5.9 million businesses in the UK - 59% are sole traders, 34% are limited companies, and the rest (7%) are partnerships. 

    At the start of 2010, the number of directors responsible for the day-to-day decisions of companies in the UK made up 27% of the business population - 1.2m to give a ball-park figure, increasing by around 800,000 in the nine years since. 

    While it’s no surprise that sole traders continue to make up the bulk of the UK’s business population at the start of 2019, it’s clear to see the number of limited companies is on the rise.

    In the buy-to-let sector, for example, that increase is being fuelled by recent tax changes that continue to nibble away at the profits of those operating as sole traders or in some form of partnership. 

    The number of people who have either incorporated their business or started out operating as a company has filtered through to the Forums, often to ask what some long-term members consider to be fairly simple questions. 

    Directors’ duties

    Directors take on several significant legal duties, including seven statutory duties that form the basis of what they’re about.

    They have to abide by the company’s constitution, paying particular attention to the articles of association – a set of written rules about running the company and signed off by any shareholders, guarantors, directors and the secretary.

    The articles of association can restrict decision-making powers. If you go above your station, certain decisions could be reversed or compensation may be owed to the company if it incurs financial losses. 

    As obvious as it sounds, promoting the company’s success and exercising independent judgement on the company’s activities is required by directors, as is taking reasonable care, skill and due diligence to avoid conflicts of interest. 

    How can they prove this? By keeping accurate records in case Companies House comes knocking or, more likely, decisions need to be explained to the board. These records are kept for at least 10 years.

    Shareholders’ powers

    Companies are limited by shares or guarantee. Shares are available to buy and go towards financing the business. In return, shareholders get certain rights, such as having a vote in company decisions, and are entitled to dividends from profits.

    Shareholders need to pass a resolution with a majority. To change the articles or company name requires a super majority of 75%.

    There is no cap on the number of shareholders a company can have but it must issue at least one share, and it’s fairly common for a sole director to be the sole shareholder and own the entire company. 

    So, shareholders stump up the cash to finance the business, receive dividends from any profits - and have the power to hold directors to account. 

    What it all boils down to

    Shareholders and directors have completely different roles, rights and responsibilities when it comes to operating a limited company. 

    Directors are responsible for the day-to-day management of a company, while shareholders have no say on that or most of the decision-making in the business.

    Shareholders are not entitled to see the daily trading and financial records either. Instead, they have to wait until the annual accounts are published and those are nine months out of date.